Overdraft Protection in Canada

Updated

Share:

Share on facebook
Share on twitter
Share on linkedin
Share on pinterest

An overdraft happens when you don’t have sufficient funds in your bank account to cover a transaction. It is a protective service that enables a customer to pay off a transaction once the bank account is in overdraft. Some of the transactions covered by overdraft protection include:

  • Checks
  • Withdrawals
  • Debit purchases
  • Automated payments
  • Inter-bank transfer

Overdraft protection aims to prevent declined transactions, non-sufficient funds, and late payment charges. An NSF charge can cost up to C$50. However, overdraft protection is not as expensive as other short-term credit facilities like payday loans.

Read on to know more about overdraft protection and all you need to know to protect yourself.

How does Overdraft Protection Work?

If your bank account is in the red, that signifies it’s in overdraft. This situation can emanate from POS transactions or a bounced check. Overdraft protection is a loan provided by your bank to take care of the excess amount. And as with most loans, it will cost you to borrow money.

You have to understand that overdraft protection is optional and restricted to a certain amount, and this is after receiving credit approval. Individuals get charged for overdraft protection in two ways:

  • Overdraft fee
  • Overdraft interest

Overdraft Fee in Canada

Firstly, an overdraft fee is what the bank charges you for the service. The amount and frequency of the charge vary from bank to bank. However, you invariably pay a fee in three ways:

  • Monthly charge: this service ensures you pay a fee monthly even when your account is in the black. Although slightly lower, it isn’t unusual for the service to cost less than C$5.
  • Pay-per-use monthly charge: with this service, the individual will be charged a fee where the account is in overdraft for at least a day. This fee is also around the C$5 mark. However, the individual won’t pay a fee where the account is in the black.
  • Pay-per-use unlimited: whenever the account goes into overdraft, the individual pays a fee within the C$5 range.

Overdraft Interest and How it Works

In addition to the overdraft fee that you pay for the service, there is a matter of additional interest. This interest is a percentage of the overdraft amount. The overdraft interest is similar to a credit card interest hovering within the 21% – 22% mark. The rates are relatively high, so you shouldn’t leave your account in overdraft for a long time.

Overdraft Protection Fee for Top Canada Banks

Bank Overdraft pay per use charge Overdraft protection monthly charge Overdraft annual interest
RBC NA C$5 22%
TD C$5 C$4 21%
BMO C$5 C$5 N/A
CIBC C$5 C$4 21%
Scotiabank C$5 including overdrawn balanceN/A 21%
HSBC C$5 monthly, including overdrawn balance N/A 21%
National Bank C$5 N/Avaries
Laurentian Bank C$5 N/AN/A

Some rates aren’t available on the website, but interest will be charged.

RBC Overdraft Protection

Customers with an RBC can pay for overdraft protection, receiving coverage that ranges from C$500 to C$500. If you pay for this service, you’ll have an additional C$5 fee alongside a 22% APR on the overdrawn amount.

Once you go beyond the overdraft limit, you’ll be hit with an extra C$5 overdraft handling fee. Customers with the Signature No Limit Banking and RBC VIP Accounts receive a waiver. An additional bonus with the VIP account allows customers to enjoy overdraft protection up to C$10,000. Quebec residents don’t get to pay the overdraft handling fee.

TD Overdraft Protection

Having a TD Chequing Account provides you with two options towards overdraft protection, with both costing 21% APR. You also have 89 days to pay off the overdrawn amount.

The first option is a monthly C$4 plan, no matter your account’s frequency in overdraft. This option is an excellent plan if your account is often overdrawn, but you’ll likely pay more fees in the long-term.  The second option is the pay-you-go service costing C$5 per service. This option isn’t available to Quebec residents.

BMO Overdraft Protection

BMO overdraft protection range from C$250 up to C$2500. Individuals get to pick from a pay per transaction model or monthly service fee. Keep in mind that you’ll not find the BMO interest rate in their fee schedule or website.

If your account regularly goes into overdraft, the extra C$5 for overdraft is an excellent choice. And if you have a Premium Chequing Account, BMO will waive the fee.

A second option is to select the pay-per-use overdraft protection service that costs C$5 per transaction. It’s also worth noting BMO has a further option that allows customs to transfer funds from one BMO account to another in the event of a shortage of funds. The fee for this service is also C$5.

CIBC Overdraft Protection

Towing the path of the rest of the BIG FIVE, CIBC allows customers the option of paying for a monthly overdraft protection plan or a pay-per-use fee. They are both subject to a 21% APR with a limit ranging from C$100 to C$5000.

If you prefer the pay-per-use plan, it will cost you an extra C$5 daily for any transaction that breaks the transaction limit on your account. The monthly option costs C$4 monthly without the pay-per-use fee. The CIBC Smart Plus Account allows you to waive this fee even though you still have to pay an APR of 21%.

Scotiabank Overdraft Protection

Scotiabank’s overdraft protection doesn’t work like the others. Rather than paying a monthly fee or paying for each overdraft transaction, Scotiabank charges C$5 monthly for every time you overdraw your account for at least one day. This service also attracts a 21% yearly interest.

The implication is that you don’t pay a fee for when your account is in good standing, and you don’t pay overdraft protection fees. However, your account must be in the black a minimum of one time every thirty days. The subsidiary bank Tangerine operates similarly with a lesser APR at 1’%.

National Bank Overdraft Protection

National Bank also operates a unique overdraft protection service compared to the rest. The bank doesn’t give you loans to cover your transactions.

Instead, funds from other National Bank accounts are channelled to your overdrawn account to cover the cost. The fee is C$5 per transaction, and you’ll pay the interest rate attached to the supplier account, be it a Mastercard account or a line of credit.

HSBC Overdraft Protection

HSBC overdraft protection ranges between C$500 and C$4999. It is like Scotiabank in that you pay a fee only for the months where you overdraw your account. The service is also subject to a 21% APR charge.

Laurentian Bank Overdraft Protection

The protection cover for Laurentian Bank ranges from C$250 to C$1250. Customers only pay for the months where their account is overdrawn and do not have to pay any fee when their account is in the black.

NSF vs. Overdraft Fees

While both  fees activate when there are insufficient funds to cover a transaction, there remain some distinguishing elements between them, as seen below:

Overdraft FeeNSF Fee
When does it happen? When you request a withdrawal that is over the limit of what’s available in your bank account When you request a withdrawal that is over the limit of what’s available in your bank account
Is the transaction successful? Yes No
What is the average cost? Around C$5 per transaction in addition to 21% interest Around C$45 per service
Is it optional? Yes, subject to credit approval No

How to Avoid Overdraft Protection Fee

Nobody enjoys paying banking fees, and below are methods to avoid being charged for overdraft protection:

Opt for the pay-per-use service

In the long run, the pay-per-use service offers excellent value for your money. C$5 monthly fee for a year is C$60 for a service you might never need. While the monthly plan is ideal for customers who go into overdraft more than twelve times a year, it is still the best choice to keep you financially responsible. This option provides an extra incentive to keep within your budget and not spend more than your income.

Keep extra funds

Once you set up your overdraft protection, ensure you use it sparingly. One way to do this is to keep extra money on the side for miscellaneous expenses including bills, and other daily payments. This option might be hard enough to ask if you aren’t making enough income. Another option is to use a budgeting app to reduce your expenses and find extra income.

Keep your Finances under control

Keep track of your finances by taking note of upcoming payments. For instance, if you have C$250 in your bank account and your monthly cellphone bill is C$80, you know your actual spending money is C$170.

FAQ

What is an overdraft?

Overdraft is spending more money than you have in your bank account, causing the bank account to have a negative balance. Many banks allow this only if you have overdraft protection or your transaction will be declined, and you’d be liable to pay an NSF fee.

What is overdraft protection?

Overdraft protection is a banking service that enables you to cover expenses beyond what’s available in your chequing account. It is a short-term loan with limited coverage that may charge you interest on the borrowed sum. There is also the matter of a transaction fee, which adds up to your total charges.

What’s an Overdraft fee?

An overdraft fee is the money you pay to enjoy each overdraft protection service. These fees cost around C$5 per transaction and can be monthly or per usage.

What is overdraft interest?

Overdraft interest is the percentage of money the bank expects in return for providing you overdraft protection. And that percentage is based on the amount of money your account has gone over. For instance, if you have C$1000 in your account and purchase an item worth C$3000, the bank will give you overdraft protection worth C$2000. The interest you pay will be 21% of C$2000.

 How does Overdraft Protection Work?

Overdraft protection works by ensuring your transactions go through even when you don’t have enough money in your bank account. However, there are eligibility requirements to be met, and you must opt in to enjoy the service.

Related Posts

Post Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Essential reads, delivered weekly

Join the Financial Literacy Train. Get the latest financial information delivered right to your inbox.

Newsletter

Deals and Offers

We’ve rounded up the Best life in Canada, with the best promotions, and the best sign-up bonuses, to help you maximize your benefits.

EQ Bank US Dollar Account

Earn more on your US dollars

World Elite Mastercard

A card for travelling with exclusive perks

Platinum Mastercard

Earn 1 point for every dollar spent

Reviews

Post Comments

Leave a Comment

Your email address will not be published. Required fields are marked *

Advertiser Disclosure

Canada Buzz is an advertising-supported blog. Some products and services that appear on this site are from companies from which Canadabuzz receives compensation. We may alter brand placements on our website to amplify our partners and their offers. Any time you click to our partner websites or register for a product or services through an affiliate link on our website, we may earn a commission at ZERO cost to you.

Canada Buzz is a purely informational blog. Opinions expressed on this blog are NOT endorsed by the reviewed brands. The information provided on this website does not constitute financial or professional advice. However, our team strives to bring you quality, unbiased information.

Chima E.

Highlights

Avid researcher, freelance writer, and personal finance enthusiast passionate about financial education and literacy.

Latest Post

Kareena Maya

Personal Finance and Travel Rewards Expert Contributor

Highlights

Experience

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.

Kareena Maya is a freelance writer focused on the personal finance and travel spaces. He frequently writes about credit cards, banking, student loans, insurance, travel rewards and more. His work has been featured in publications such as Forbes Advisor, Bankrate, Credit Karma, Finance Buzz, The Ascent and Student Loan Planner.