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The short answer
Overdraft interest is usually worked out every day on the amount you are actually overdrawn, at the annual rate divided by 365 (some banks use 360), and the daily amounts are added up and charged to the account once a month. You pay nothing on the unused part of the limit, though some banks charge a separate fee on the limit itself.
An overdraft lets your current account go below zero up to an agreed limit. It is one of the most flexible forms of credit, and one of the least understood, because the balance moves every day and the interest charge appears as a single line at the end of the month. Here is how that line is built, so you can check it.
The daily accrual method
Most banks follow the same three steps, though your offer letter sets the exact terms:
- At the end of each day, the bank takes your overdrawn balance, the amount below zero.
- It multiplies that balance by the annual rate and divides by the day-count basis, usually 365 days.
- At month end it adds up the daily figures and debits the total to your account, often on the last working day.
On a day when your account is in credit, no overdraft interest accrues for that day. That is why paying money in early, even for a few days, reduces the charge.
Worked example: one month on an overdraft
Example figures only. An overdraft limit of ₦500,000 at 30% a year, a 30-day month, interest calculated on a 365-day basis. The daily rate is 30% ÷ 365, about 0.0822%.
| Days | Overdrawn balance | Days at that balance | Interest |
|---|---|---|---|
| 1 to 10 | ₦200,000 | 10 | ₦1,643.84 |
| 11 to 20 | ₦450,000 | 10 | ₦3,698.63 |
| 21 to 30 | ₦100,000 | 10 | ₦821.92 |
| Month total | 30 | ₦6,164.38 |
Row figures are rounded to the kobo; the exact total is ₦6,164.38. A quicker way to the same answer: add up the daily balances (₦200,000 × 10 + ₦450,000 × 10 + ₦100,000 × 10 = ₦7,500,000), multiply by 30% and divide by 365. The result is ₦6,164.38. If the bank uses a 360-day basis, the same month costs ₦6,250.00, about 1.4% more.
When interest is posted
Once ₦6,164.38 is debited, your overdrawn balance on day 31 is ₦106,164.38, not ₦100,000. If you stay overdrawn, next month's daily interest is worked out on the larger figure, so interest is charged on interest. Over a year, monthly posting makes the effective cost a little higher than the headline annual rate.
The year's cost against what you actually used
Suppose the same pattern repeats for twelve months. Your average overdrawn balance is ₦250,000 (₦7,500,000 ÷ 30 days). Interest is about ₦6,164.38 × 12 = ₦73,972.56 before any interest on posted interest, and the ₦5,000 limit fee in the next section brings the year to about ₦78,972.56. That is about 31.6% of the money you actually used on average, slightly above the 30% headline, and higher still once monthly posting is counted. If you had used the overdraft only a few days a month, the limit fee would weigh much more heavily against a tiny interest bill, which is why a large, rarely used limit can be an expensive comfort.
Other charges on an overdraft
- Fee on the limit. Some banks charge a management, commitment or facility fee on the full approved limit, whether you use it or not. Example: a 1% fee on a ₦500,000 limit, charged once when the limit is approved for a year, is ₦5,000.
- Excess or unauthorised overdraft. Going above the limit usually attracts a higher rate, or a penalty, on the excess. Example: exceeding a ₦500,000 limit by ₦20,000 for three days at an extra 2% a month adds ₦40.
- Renewal fees. Overdrafts are usually approved for a fixed period, often a year, and renewing may carry a fee.
- Account maintenance and transfer charges apply as on any current account.
How the rate is set
Overdraft rates are usually priced as a margin above the bank's own prime or reference rate, and are reviewed more often than fixed loans. The CBN publishes industry prime and maximum lending rates on its Money Market Indicators page. Its Monetary Policy Rate, which influences banks' funding costs, was reset to 23% at the September 2026 MPC meeting, according to the CBN's decisions page. See how MPR reaches your loan rate.
How to keep overdraft interest down
- Pay income into the overdrawn account as soon as it arrives, so the daily balance falls at once.
- Time large outgoing payments close to when money is due in.
- Ask the bank which day-count basis and posting date it uses.
- Keep well below the limit to avoid excess charges.
- Compare the fee on the limit with how much you actually use; if you use it rarely, a smaller limit may be cheaper.
For a comparison with short loans, see overdraft versus loan app.
Where Pryme fits
Pryme does not offer overdrafts. Loans on Spaces, lent by Solid Allianze Microfinance Bank, are a different product: the amount, cost and repayment date are set out in an agreement you accept, and the money is spent with Spaces merchants. Our guide to Loans on Spaces versus an overdraft compares them.
Questions people ask
Is overdraft interest charged daily or monthly?
It is usually calculated daily on the overdrawn balance and charged once a month. Check your offer letter for the posting date.
Do I pay interest on the full overdraft limit?
No, interest is charged only on what you use. Some banks charge a separate fee on the full limit.
How do I calculate overdraft interest in Nigeria?
Add up your overdrawn balance for each day of the month, multiply by the annual rate, and divide by 365 (or 360 if the bank uses that basis).
What happens if I exceed my overdraft limit?
The excess usually attracts a higher rate or a penalty charge, and the bank may refuse payments. Check your bank's tariff and offer letter.
Sources
- CBN: Money Market Indicators (includes prime and maximum lending rates) · accessed Oct 2026
- CBN: Monetary Policy Decisions (305th to 307th MPC meetings, 2026) · accessed Oct 2026
This article is general information, not financial, legal or tax advice. Products described are provided under the terms on this site and are subject to regulation and eligibility.