Overdraft fees are charged by banks for a number of reasons. They are not included in the interest on a loan and should be calculated separately.

Overdraft fees come in a number of forms, but there are two main types, administrative fees and penalty fees. Administrative fees are charged for the overdraft’s arrangement and maintenance, and are part of the normal cost of business. Penalty fees are assessed when something goes wrong with the account holder’s management of the loan, and are only applicable when something unusual happens, such as the loan balance going over the overdraft limit. These fees can differ from bank to bank, and even from account to account.

There are two main administrative fees for overdrafts, although not all banks will charge these fees. These are the arrangement fee and the account holding fee. 

The arrangement fee is charged when an overdraft limit has been agreed between the borrower and lender, and is almost always charged at the outset of an overdraft. The fee may also be charged when the overdraft is periodically renewed or when there has been a change to the overdraft limit, although these fees may be considerably lower than the initial arrangement fee. This fee is designed to cover the setup costs, such as the administrative costs and the costs of a credit check on an applicant.

The holding fee is usually a monthly charge to cover the cost of sending out statements and other day-to-day administrative activities. With some transaction accounts these fees are actually part of the monthly maintenance fee, and no extra fee is chargeable.

Penalty fees are charged when the account holder breaches the terms of the credit agreement. The most common penalty fee is the one charged when an account holder goes over their account limit. These can be charged every month or even every day that the account is over the limit. Sometimes a penalty fee is invoked because there was no overdraft arranged before the account went overdrawn.

These fees do not tend to be noticed by some borrowers as they are added to the bank statement, although some penalty fees may have notifications sent when the fee in incurred.