What is a potential limitation of using a bank overdraft?

High interest rates associated with a bank overdraft can significantly impact a borrower's financial situation. When an individual or business enters into an overdraft agreement with their bank, they are allowed to withdraw more money than is available in their account, but this convenience comes at a cost. The interest rates on overdrafts are often much higher compared to other forms of credit, such as personal loans or standard lines of credit. This means that if the overdraft is used frequently or for extended periods, the cumulative interest charges can lead to a substantial financial burden.

Moreover, the nature of overdrafts can lead to unintentional over-reliance on this form of short-term funding, which might entice individuals to use it without fully comprehending the cost implications. Understanding this limitation is crucial for effective personal financial management and helps in making informed decisions regarding expenditure and borrowing.