Your overdraft quote has three prices, not one
A facility letter often reads as a single rate, but the all-in cost is built from three pieces — and any one of them can dominate the bill depending on how you actually use the line.
- The headline rate. What the bank quotes on the drawn balance. Useful for comparing facilities, but on its own it understates the cost.
- The interest on what you actually draw. Applies only to the dollars you use, accrued by day if the letter says interest is charged daily.
- The fees attached to having the facility. Arrangement, renewal, unused-line, sometimes a commitment fee on the undrawn portion. These can hit whether you draw or not, and on short draws they can outweigh the interest.
The cost stack
The headline rate covers the interest line. Every other piece — arrangement, commitment, unused-line — adds to the bill and gets rolled into the effective APR. Bar widths are illustrative; the actual proportions depend on draw size, days used, and which fees your facility letter lists.
Interest on drawn balance
What the headline rate covers. Usually the largest line.
Arrangement fee
One-time at facility setup or annual renewal.
Commitment fee on undrawn portion
Per-year on the capacity you reserved but didn't use.
Unused-line fee
Flat per-period; some lenders add it, others don't.
Effective APR
Total cost ÷ drawn amount, annualized. The apples-to-apples cost rate including every fee — what the facility actually charges, not just the headline number.
Facility-letter decoder
Common bank phrases, plain-English meaning, and where each one lands in the calculator. Wording can vary by lender — check your specific letter.
| Bank phrase | What it means | Where it hits the calculator |
|---|---|---|
| Limit | Maximum you can borrow | Does not cost interest until drawn; sets the “Facility limit” field |
| Drawn balance | Amount you actually used | Interest applies here; sets the “Utilized amount” field |
| Margin or spread | The bank's markup over the base rate | Raises the daily interest charge; folded into “Lending rate” |
| Arrangement fee | Setup or renewal cost | One-time charge; can dominate short draws |
| Commitment fee on undrawn | Per-year charge on the unused portion | Cost of reserving capacity you didn't use |
| Unused-line fee | Flat per-period charge some lenders add | Hits regardless of draw amount |
| Daily interest | Interest accrued each day | Timing of repayment matters; paying down sooner cuts the bill |
| Effective APR | Total cost annualized, including fees | Use to compare against a term loan or business card |
What the calculator shows
The answer panel lays out the cost stack in the order most facility letters use: interest first, then each fee that applies, then the total and the effective APR. Two comparison rows sit below it — what the same period would cost if you held the line unused, and what it would cost if you drew the full limit. Both help you decide whether the unused capacity is earning its keep.
For most facilities, interest on the drawn balance is the largest line. On short draws or small utilization, the fees can rival or beat the interest line — that's the part the headline rate alone can miss.
A worked example
A small-business owner has a $50,000 overdraft facility. To bridge payroll and materials before a customer's invoice clears, she draws $18,000 for 45 days. Her facility letter quotes 10% APR on the drawn balance, charges a 0.50% commitment fee on the undrawn portion, and includes a $500 arrangement fee charged once at facility opening (or at annual renewal — terms vary).
Running these inputs in the calculator above produces roughly:
- Interest on the $18,000 draw: ~$225 ($18,000 × 10% × 45 / 360)
- Commitment fee on the $32,000 undrawn portion: ~$20
- Arrangement fee, if allocated to this draw: $500
- Total cost, if the full fee is allocated here: ~$745
- Effective APR, on that allocation: ~33%
The headline rate is 10%. If you allocate the full $500 arrangement fee to this single 45-day use, the effective cost looks closer to 33% because a one-time fee spread over only 45 days annualizes harshly. The arrangement fee is typically a facility-opening or annual-renewal cost, though — it isn't re-triggered by every short draw. Spread the same $500 across every draw you expect to make in the year and the per-draw effective rate drops significantly.
Two takeaways for any facility quote:
- For short, isolated draws, fees can outweigh interest. A “low” headline rate is not the full cost.
- A facility used for many days at high utilization, or many small draws across the year, tends to show an effective APR much closer to the headline rate.
The calculator includes any arrangement fee in the total cost line as entered — set the field to 0 if you want to see the per-draw cost without the facility-opening fee allocated in. Swap in your own numbers above to see how the effective APR moves for your draw. Outputs are a planning estimate — confirm the live figures against the facility agreement and your bank's relationship team.
Where business owners get surprised
- The quoted rate is not the full cost. The arrangement fee, any monthly facility fee, and any commitment fee on the undrawn portion can all add to the bill before you compute the effective rate.
- On a short draw, fees can matter more than interest. A one-time arrangement fee spread over 30 or 45 days behaves like a high annualized cost. Spread over a year, the same fee may barely move the effective rate.
- Keeping unused capacity can have a price.If your facility has a commitment fee on the undrawn portion, that line accrues whether or not you ever draw. Useful as backup liquidity, but it isn't free.
- Daily interest means timing matters. If your letter says interest is charged daily on the drawn balance, paying down by even a few days can lower the bill. Monthly-accrual facilities are less sensitive to timing.
- Rolling the same balance for months behaves like working-capital debt. Overdrafts are built for short timing gaps. A balance that lives on the facility for many months may be cheaper handled by a term loan or a permanent line of credit — ask your bank.
- Renewal and review fees can repeat. Some facilities charge a fee at each annual renewal. Multi-year revolvers also typically come up for review on a schedule.
- Lenders can reduce or call the facility. Many facility letters give the bank the right to reduce, freeze, or call the line depending on covenant tests or business performance. Treat available capacity as conditional, not guaranteed — check your specific agreement.
When an overdraft is the right tool — and when to compare a term loan
Overdrafts and term loans solve different problems. The decision usually comes down to how long the balance will stay drawn, how predictable the use is, and how heavily the facility fees fall on your draw size.
| Overdraft tends to fit when… | Compare a term loan or installment line when… |
|---|---|
| You need money for a short timing gap, not a fixed purchase | The balance will stay drawn for months at a time |
| Payroll, materials, or vendor payments while receivables clear | You're funding a specific, fixed purchase — vehicle, equipment, buildout |
| Cash flow is seasonal and the draw amount is unpredictable | Arrangement or commitment fees on the overdraft are starting to dominate |
| You want flexibility to pay down and re-draw the same month | You know the repayment date and want a fixed monthly payment |
| The facility is already in place and approval delay matters | You're uncomfortable with the lender's right to reduce or review the facility |
A side-by-side cost view is on the overdraft vs. term loan vs. credit card calculator. If you're weighing how much income the bank earns on the same facility, the lender's view shows the other side. For background on how interest accrues day by day, the how overdraft interest is calculated guide walks through the day-count basis.
The math, if you want to check it
For anyone running the numbers by hand, this is the cost stack the calculator builds. The defaults assume the US commercial Actual/360 day-count convention; UK and TILA-disclosed amortizing loans more commonly use Actual/365 — check your facility letter for the specific basis.
interest = utilized × lending_rate × days / 360— interest on the drawn balance, accrued dailycommitment = (limit − utilized) × commitment_fee × days / 360— fee on the unused portiontotal_cost = interest + arrangement + commitment + renewal + unused-line(renewal fee is annual, period-scaled by× daysDrawn / 365)effective_APR = total_cost / utilized × (360 / days) × 100— simple-interest annualization including fees, not a compounded TILA APR
A few mechanics this view deliberately does not model: variable utilization across the period (the calculator treats your draw as constant for the days entered), prepayment penalties (uncommon on revolvers), and covenant or reporting cost (real, but not in the dollar math). For LC subfacilities, ABL audit and monitoring fees, drawdown fees, or Actual/365 facilities, the lender income calculator exposes the additional inputs.
Output rows, explained
The decoder table above covers the input fields. These are the rows the answer panel returns — what each output number actually represents.
- Interest charge
utilized × lending_rate × days / 360— the dominant cost line on most facilities.- Total cost
- Sum of interest charge + every fee that hits the period.
- Effective APR (annualized)
total_cost / utilized × (360 / days) × 100. The apples-to-apples cost rate including fees — what you actually pay, not the headline lending rate. Simple-interest annualization, not a compounded TILA APR.- Per-day cost
total_cost / days. Useful for deciding the carrying cost when use is lumpy (e.g., is it cheaper to draw for 3 days or hold the balance for 30?).- If you held this line unused
- What the same period would cost at $0 utilized — just the fees that accrue regardless of draw (commitment + arrangement + renewal + unused-line). Helps decide whether keeping the line open is worth it as working-capital insurance.
- If you drew the full limit
- What the same period would cost at 100% utilization. Lower effective APR than partial draws because the commitment fee disappears (nothing undrawn) and fixed fees amortize against a larger base.
Frequently asked questions
Why is the effective APR higher than the lending rate?
Because fees count. The lending rate gets you the interest charge, but if your facility has an arrangement fee, a commitment fee on the undrawn portion, or an unused-line fee, those all add to the total cost. Effective APR annualizes the whole package — total cost / utilized amount × base/days × 100. On a $250K draw of a $500K line for 90 days at 8% with a $1,000 arrangement fee and 0.50% commitment fee on the undrawn portion, the lending rate is 8% but the effective APR runs ~10.10% Actual/360. The fewer days you draw, the harder the fixed fees hit the annualized rate.
Why is the effective APR LOWER if I draw the full facility limit?
Two reasons. First, the commitment fee on the undrawn portion goes away when you fully draw — nothing's left undrawn. Second, fixed fees (arrangement, unused-line) amortize against a larger principal base. Same $1,000 arrangement fee against $250K is 0.40 percentage points of effective cost; against $500K it's 0.20 points. The comparison row shows what your full-draw effective APR would be — useful when deciding whether to draw the full limit at once or take it down gradually.
What's a typical commitment fee on a business overdraft?
Many facilities quote commitment fees in the low basis-point range, often around 0.25%–0.50% per annum on the undrawn portion, but relationship, facility size, and lender type can move it meaningfully in either direction. Larger commercial customers with strong banking relationships often see lower rates; smaller or non-relationship facilities can be higher. The commitment fee compensates the lender for reserving capital against the unused limit. Many small-business overdrafts don't charge one at all — if your facility documentation doesn't list it, set the field to 0 and ask your lender's relationship team to confirm.
Why does this calc default to Actual/360 day-count?
Actual/360 is common in US commercial lending, which is why this borrower view defaults to it — money-market instruments and many US commercial loans accrue interest at rate/360 per actual day. Over a calendar year (365 days), this produces about 1.39% more interest than the nominal rate suggests; a 5% Actual/360 facility yields roughly 5.07% over a year. UK / sterling facilities and US TILA consumer-credit disclosures more commonly use Actual/365. Check your facility letter — if it specifies a different basis, the lender income calculator (linked above) lets you switch day-count explicitly.
What's the difference between this and a personal loan calculator?
A personal loan is amortizing — fixed monthly payment, principal goes down over time. A business overdraft / revolving line is open-balance — you draw what you need, pay interest only on the drawn amount, and repay flexibly. The math is different (simple interest on a fluctuating balance vs. full amortization schedule), and the fee structures are different (arrangement + commitment + unused-line on revolvers; origination on term loans). For amortizing personal or business loans, use the effective-APR calculator instead.
Should I keep an unused overdraft just for emergencies?
Depends on the commitment fee + any flat fees. The 'If you held this line unused' comparison row in the answer panel surfaces this number directly — it's the same period at $0 utilized, so just the fees that accrue regardless of draw. For a $500K facility at 0.50% commitment fee, that's roughly $2,500/year — cheap insurance against a working-capital shortfall if your business has lumpy receivables. For a $5M facility at the same rate, that's $25,000/year — at that point the facility needs to actually do work or it's not earning its keep. Compare against your alternative funding cost (e.g., what would a same-amount term loan charge?) to decide whether the optionality is worth the carry.
What I'd do next
- What kind of facility am I looking at?
Orient on overdraft vs revolver vs ABL vs LC subfacility before modeling the cost — the labels matter more than borrowers expect.
- Same facility, lender's view
Flip the perspective. What the bank earns on the same facility — interest, commitment fee, NII, spread, and yield on limit.
- How to negotiate the rate, fees, and structure
Pre-call memo on what is actually negotiable beyond the rate — sequenced for a real conversation with the bank.
- Effective APR for term loans
If you're modeling a term loan with origination fees instead of a revolving line, the effective-APR calculator handles fees / prepay / tax in one place.
Written by James L. Wu. Methodology context from CFPB consumer credit guidance (effective-cost framing), Federal Reserve H.15 series (commercial loan rate context), and the OCC Comptroller's Handbook on Loan Portfolio Management (commitment fee accrual practice). This is a planning estimate, not financial, legal, or tax advice. For specific facility decisions, confirm against your facility agreement and work with your bank's relationship team or a qualified accountant.