Generally, people try to keep money aside to meet their three to six months' expenses. Still, they sometimes need funds to meet an emergency.
Overdraft is a credit facility offered by the bank to enable you to withdraw money from your bank account even if you do not have any balance in your account. It offers immediate access to extra funds. It is very ideal for temporary emergency funds, sudden financial need or any unexpected expenses. It can help tackle your short term financing needs smartly. The overdraft facility is of short period that can be renewed after 12 months. To apply for OD facility, the applicant must be an account holder in the bank.
You may have a pre-approved overdraft facility, in which whenever you need money, you can withdraw it from your account and it will go into overdraft. Otherwise, you can request your bank for an overdraft then you will get the requested overdraft amount.
Usually, overdraft facility is offered by the bank to a person against his collateral assets such as bank FD, house or commericial property, insurance policies, shares, bonds, etc. Some of the banks also offer unsecured overdraft.
Types of Overdraft
- Overdrafts against salary
- Overdrafts against fixed deposits
- Overdrafts against house or property
- Overdrafts against life insurance policy
- Overdrafts against equity holdings
- Unsecured Overdraft
Even after the overdraft is approved, the money is not released to you immediately, and you can withdraw money as per your requirement from this overdraft account. You just need to pay the interest on the money borrowed and for the period you have availed it.
How Does an Overdraft Account work?
In your OD account, you can withdraw and deposit money anytime as per your need. You will have to pay interest only on the amount you have utilised which is calculated on a daily basis. Suppose you have an OD account with a limit of Rs 80,000 and you withdraw Rs 30,000, your remaining withdrawal limit of OD account will be Rs 50,000. After 7 days, if you deposit Rs 30,000 and its interest in your OD account, then you need to pay the interest on Rs 30,000 for 7 days only. After depositing Rs 30,000, your withdrawal limit will again become Rs 80,000.
Features and Benefits of Overdraft
|Make use of additional funds even though it is below zero||Interest is charged only for the amount utilized|
|Overdraft help manage working capital requirements effectively||Multiple withdrawals are allowed from the OD account up to the limit sanctioned|
|The OD facility is extended for a period of one year and can also be renewed||OD can be activated with minimal documentation|
|Flexibility to pay the outstanding amount of overdraft||Nil pre-closure charges|
Eligibility for Overdraft Facility
You must be interested to know as to who is eligible to get an overdraft facility. Generally, overdraft facility is available to business entities to meet their working capital requirements even when they do not have any balance in their bank account. However, some banks offer Overdraft to its individual customers also in order to offer them a value added service.
Following people can apply for an overdraft facility:
- Resident Individuals
- Hindu Undivided Families (HUF)
- Proprietorship Firm
- Partnership Firm
- Limited Liability Partnership
- Private Limited Company
- Public Limited Company
Factors Determining Interest Rate on Overdraft
Majority of the banks offer overdrafts to their customers with predetermined limits. These predetermined limits will be based on customers' repayment capacity, type of bank account, account balance, nature & value of collateral and financial standing. It will also depend upon the relationship between the bank and the customer.
A healthy credit score of the customer also play a vital role in deciding the predetermined overdraft limit. The interest rate on OD is pre determined, however, it may increase on your making any default in its repayment.
Overdraft Vs Personal Loan
Overdraft is a product offered by the banks that allows to withdraw money even when there is no money in your account. It is a credit line given by the bank for a short period of time. Personal loan is a type of loan that does not require any collateral and money such obtained can be used for any legitimate financial purpose.
There are many differences between Overdraft & Personal Loan which are outlined below:
|Basis of Difference||Overdraft||Personal Loan|
|Nature of loan||Secured or Unsecured||Unsecured|
|Paperwork||Online hence no paperwork||More paperwork|
|Processing Time||Processed very quickly||Takes more time in processing|
|Interest||Pay interest only on tde amount used and for tde duration of utilisation||Interest starts to accumulate immediately even if you are not using tde money|
|Impact on Credit Score||Generally gives positive boost to credit score||May give positive or negative boost to credit score depending upon tde repayment capacity|
|Foreclosure Charges||Nil||tdere will be foreclosure charges|
|Interest calculation||Interest is calculated on daily basis||Interest is calculated on montdly basis|
|EMI||No EMI is allowed for repayment||You have to pay a fixed EMI during the loan tenure|
Interest Rate on Overdraft
Overdraft is a revolving short term line of credit. The borrower can opt for OD facility anytime and repay the same as per his own convenience. Since the overdraft is not repaid as per a fixed schedule, interest on the overdraft is calculated on daily basis. The borrower can repay the overdraft amount as and when he wants. It is also not necessary to inform the bank for the same. As soon as he repays the OD amount, the outstanding balance in his OD account gets reduced. The borrower has to pay interest only on the amount used and for the duration of utilisation.
FAQs on Overdraft
You can apply for an overdraft from your bank. Nearly each bank, no matter public or private, offers OD facility to its customers wherein customers can get money for short term to meet their urgent expenses.
Resident Individuals, HUF, Proprietorship Firm, Partnership Firm, Limited Liability Partnership, Private Limited Company, Public Limited Company, etc. are eligible for an overdraft.
Almost every bank in India offer OD faciity. Some of the customers get pre-approved OD amount by their banks. Otherwise, one can pledge his property to apply for an overdraft facility with his bank.
OD facility is good for you when you have an urgent need of funds to meet your unexpected short term expenses because you can get and use OD amount in a few seconds. Further, you will have to pay interest only on the amount used and for the tenure of its usage.
Yes, you can anytime withdraw cash from your OD account. With an OD facility, you are allowed to make ATM withdrawals even if you do not have any fund in your bank account at the time of making transaction.
The interest on OD is calculated on daily basis. Remember that you have to pay interest only on the amount used and for the tenure of its usage.
Overdraft against Salary is a type of OD which you can avail against your salary account. Here, you can withdraw an amount over and above the balance avaibale in your salary account as per your requirement.
Yes, overdraft is a credit facility like a loan which is offered by almost every private or public bank in India. It is a short-term line of credit which can be used to meet an emergency.
Overdraft offers you a facility wherein you get an immediate access to extra funds in case of emergency. Secondly, you can repay the same as per your convenience as the overdraft is not repaid as per any set schedule. Thirdly, you need to pay interest only on the amount used and for the tenure of its usage. Fourthly, its processing is very fast and simple.
In an overdraft, you have access to less funds than in case of a personal loan. Interest charged on an overdraft is higher as compared to some other types of loans such as home loan, etc.