Canada Law on Overdraft Fees: Important Provisions You Need to Know

Canada law on overdraft fees in recent times has it that banks in Canada should begin charging high fees for their services, which is making banking transactions costly for regular Canadians.

One of the affected services is the Overdraft protection program that helps you as a customer to successfully execute your transaction when you don’t have enough funds in your account for such a transaction.

This particular service has been in existence for a while and most banks offer it to their customers at an affordable fee.

However, recently, the fees charged on overdrafts have become so high that the Canadian government has been forced to enforce certain regulations to guard people from expensive bank fees.

The new rule is that no bank is allowed to charge beyond $5 each time your account goes into overdraft. If it turns out that your account is overdrawn, the bank can charge you a pay-per-use fee each time you carry out a transaction.

Furthermore, banks are obligated to inform customers within five business days when an overdraft charge has been applied, and unless the customer agrees, they have no right to charge overdraft fees on transactions that made the account become overdrawn.

Now that you’re aware of the Important Provisions in Canada’s Law on Overdraft Fees, it is time to take a tour of what an Overdraft is, how it works, how to avoid it, and more.

What is an Overdraft?

An overdraft occurs when one doesn’t have sufficient money in their checking or savings account to cover for a transaction but the bank approves it anyway. This is the bank’s way of giving you credit when you no longer have anything in your account. The credit gives you the grace to continue taking money from the account even when the balance has gotten to zero. 

What are Overdraft fees?

This is a fee charged when the bank helps you to cover the difference between the amount that you have in your account and the cost of the transaction. This is part of an overdraft protection service. The bank covers the difference and then charges you a service fee.  

To make things clearer for you, here is an overdraft fee example:

For instance, you have $80 in your account but there is an emergency that warrants you to cough up $100, obviously, you are $20 short. As someone who is covered by the bank’s automatic overdraft service, if you make the transaction, the bank will let it go through despite your falling short. They make this happen by covering the $20 difference and then charge you an overdraft fee of let’s say $25. These two figures will be added together leaving you with an outstanding balance (negative balance) of -$45 in your bank account.

More on Overdraft fees

Basically, in cases where the bank is supposed to reject a transaction due to insufficient funds, it approves it and then charges you for the difference as well as a service fee known as an overdraft fee.

Just like any other loan, the bank charges you interest on the outstanding balance of the overdraft loan that you’ve been given. 

An overdraft loan may be preferable to some other types of loan, especially in times of emergencies, due to the low interest that is often charged on them.

To eliminate the risk of being rendered an overdraft service and then charged an overdraft fee without your knowledge, federal regulators mandated that certain financial institutions seek your permission before adding you to the overdraft protection program.

This means that if you want such a service, you will have to request it when opening your checking or savings account. 

Furthermore, banks are not allowed to tamper with a customer’s transaction with the intention of increasing the amount of overdraft fees that they can charge. 

Also read about consolidation loans in Canada.

Canada Law on Overdraft Fees: How to qualify for Overdraft Protection?

Since overdraft protection is also a kind of credit, you might find out that not everyone qualifies to get it. 

Although the application process is easy, there are certain criteria that financial institutions check before granting you access to this service. Some of them include:

1. You must be up to 18 years of age in provinces such as Alberta, Manitoba, Ontario, Quebec, and so on. However, in provinces such as New Brunswick, Nova Scotia, Yukon, and so on, you are required to be at least 19.

2. Your income.

3. Your credit history.

How do I Avoid Overdraft Fees?

You might find the need to settle overdraft fees every now and then a little annoying – as they are an unnecessary expense that takes money from you – especially if you want to avoid them but don’t know how to. Not to worry, below are some precautions that you can take:

1. Deselect automatic overdrafts: Although an overdraft service helps you to avoid the headache, and sometimes the embarrassment of failed transactions by helping you to cover the difference between the amount needed and the amount you have in your account, it is not a compulsory service. 

While filling out the paperwork for a new account, part of the form that you will fill asks if you want this service or not, you can always reject it. Once you deselect the service, your bank won’t cover you if you fall short in a transaction, but you also won’t be charged an overdraft fee.

2. Switch banks: Not all banks in Canada offer an overdraft service, so you always have the option of changing to a new bank that will not charge you an overdraft fee.

3. Endeavor to maintain a cushion balance: Another way to avoid overdraft fees is to ensure that you always have a little extra in your account to cover those charges that you might not expect or foresee.

4. Monitor your account balance: The easiest way to avoid overdraft fees is to keep track of what you have in your account balance. This can be easily done by signing up for bank alerts. If you are always aware of how much you have left in your account, you are very likely to not spend above it. 

Advantages of an Overdraft

1. It ensures a successful transaction: In times when you don’t have sufficient funds in your account to cover a transaction, an overdraft increases the chances of the transaction going successfully.

2. It is useful in times of emergencies: If an emergency expense comes up and you need to carry out a transaction as soon as possible but don’t have enough funds in your account, an overdraft helps to make sure your transaction goes through anyway.

3. It helps you to avoid overdraft fees: If you don’t have overdraft protection and you overdraw your account, you might be charged more than one overdraft charge in one day. Someone who has overdraft protection doesn’t run this risk.

4. It is always accessible: You can always access an overdraft whenever you need it.

5. No fixed repayment amount: Unlike in the case of a loan, where you are required to pay back a particular amount, probably every month, an overdraft lets you make payments according to your financial capability.

6. Speedy application process: Applying for an overdraft is simple and quick. You can easily opt for the service when opening your account or simply ask for it afterwards. 

Disadvantages of an Overdraft

1. It can be expensive: One of the disadvantages of overdrafts is that the fee and interest charged on some of them are so high, that it sometimes makes them expensive.

2. You can easily fall into debt: Due to how easy it is to access and the fact that there is no repayment term, you may easily get carried away with spending, and end up staying in your overdraft for a long time.

3. Lower borrowing limits: Compared to loans, the amount you can access with an overdraft is much lower.

Differences Between an Overdraft and a Loan

1. An overdraft is a service that allows account owners to transact on their account when they don’t have sufficient funds while a loan is a sum of money that is collected for a purpose and returned within a period of time with interest. 

2. An overdraft doesn’t require any form of collateral while some loans do. 

3. For overdraft, you only pay interest on the amount that you use while for loans, you are charged interest on the entire amount disbursed to you.

4. The interest rates on overdrafts are usually fixed while loans can have either fixed or variable interest rates. 

5. When you are repaying an overdraft loan, you are required to make payments using bank deposits while regular loans are repaid via any means chosen by the lender. 

6. An overdraft is a credit facility while a loan is a borrowed capital.

7. An overdraft serves as a source of short-term funds while a loan serves as long term. 

8. The interest rate on overdrafts is calculated on a daily basis while the rate on loans is calculated on a monthly basis.

9. For a loan, you don’t need to have an account with a bank before you can borrow but for an overdraft, having an account with the bank is the only way you can access the credit. 

To sum up:

If you make use of the overdraft service, it can help you out in times of emergencies but you need to be aware of the fees that come with them so you don’t end up with a significant amount of debt.

To protect users such as yourself, the Canadian government has made certain Important Provisions in Canada’s Law on Overdraft Fees. Ensure to familiarize yourself with such provisions so you will be aware of your rights as a customer.