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Overdraft Account

An Overdraft is an extension of credit issued by a Bank or NBFC, when your account balance hits zero. The overdraft limit allows the account holder to continue to withdraw money even though the account has no funds in it or insufficient funds to cover the withdrawal amount. An overdraft facility is offered on the bank’s discretion and your financial standing with them. Banks usually charge an interest on the overdraft amount and also charge a nominal fee for providing you the facility.

An Overdraft facility is generally availed by business entities to manage their monthly cash flow. In businesses that work on credit, this overdraft facility helps them to continue their business without worrying about funds.

How does an Overdraft work?

Overdrafts are usually offered based on your account balances, pre-sanctioned loan offers, existing assets such as bank FDs, shares and bonds offered as collateral. It very much works like an approved loan. Money can be withdrawn from your account when needed and the interest shall be paid when due.

You can repay money to the lender in an overdraft, either in full or in part, whenever you wish. After repaying whenever you have money, you can withdraw money from your account again according to your need until the overdraft limit is reached.

Key features of Overdraft

  • An Overdraft is a credit agreement between you and the bank that allows you to withdraw more that the amount in your bank account
  • This facility is extended by the bank to eligible customers based on their financial standing with the bank.
  • Overdraft limit, interest rate and other terms and conditions will vary based on the assets offered as collateral.
  • Overdraft limits work like a loan too. But you will be charged interest only when you withdraw the money and also, only on the amount you have utilized.
  • Overdraft limits are of great benefit to small businesses who have cash flow needs.
  • Repayment tenure differs on the amount of overdraft facility and the individual customer.
  • In recent years, many banks and financial institutions have started offering this overdraft facility to salaried individuals too.
  • Interest rate is similar to Personal Loan interest rates. 
  • No prepayment or part payment penalty charges. Make payments anytime for any amount as per your business needs.

Types of Overdrafts

A borrower can get an overdraft facility on a secured or unsecured basis. Secured overdraft is one where you pledge a collateral. In case you can't settle the overdraft, then the lender will be able to sell off the properties to adjust against the dues. You are liable to pay the difference amount in case the collateral does not compensate for the outstanding dues.

You can get overdrafts on the following collaterals:

  • Overdrafts on Invoice Receivables
  • Overdraft on House property
  • Overdraft against Fixed Deposits
  • Overdraft against Insurance Policies
  • Overdraft against Equity
  • Overdraft against Salary

Eligibility criteria to get an Overdraft facility

Overdraft facilities can be availed by customers of a bank or an NBFC. They should have been a good customer of the bank for some time and have a good financial standing on their account. Individuals, business owners, sole proprietors or partnership firms and even joint account holders are eligible for an overdraft limit.

How much Overdraft limit can one get?

  • As stated earlier, Overdraft limit is account specific. It is offered based on your account balance and collateral provided.
  • Businesses with invoice receivables can get up to 90% of the invoice value as overdraft limit
  • In case of overdraft against house property, 40 – 50% of your house property can be availed as overdraft.
  • In case of fixed deposits, you can get up to 75 – 80% of the FD amount as overdraft.
  • In case of salaried individuals, overdrafts of up to 2 – 3 times of your monthly salary are offered.
  • Insurance policies can get you overdraft based on the surrender value of the insurance policy. They get you a higher overdraft limit compared to FDs.
  • Though Equity is not a preferred collateral for overdrafts, they do fetch a decent limit nevertheless. The overdraft limit on equities is less due to their market linkage.

Who offers Overdraft facilities?

Overdraft facilities are primarily offered by banks to business entities. However, in recent times, it is being offered by NBFCs too. It is no longer limited to business entities, even salaried individuals are able to get overdraft facility these days.

Interest rates on Overdraft facility

Interest rate on Overdraft facilities is calculated on a Daily average basis. They charge based on the prevailing repo rate.

Overdraft Interest rates – Repo rate + 2 to 5%

Repayment tenure on Overdrafts

Overdrafts do not have a fixed repayment tenure. They are usually extended for a particular period of time and you can withdraw and repay a number of times up to the limit of the overdraft.

Overdrafts don’t get repaid by EMIs unlike term loans. You are free to repay any amount any number of times.

Banks usually extend Overdraft limits on a case by case basis.

Overdrafts FAQs

1. Who can apply for an Overdraft?

Though traditionally overdrafts were given to business entities, these days any eligible customer of the bank can apply for an overdraft facility.

2. Do I need to submit collateral for an Overdraft?

Overdrafts can be secured or unsecured. Your Overdraft limit and other terms depend on the collateral you submit.

3. Are Overdrafts available only with banks?

Overdrafts were primarily issued by banks to their long standing customers. However, in recent times, this has changed and even NBFCs are offering Overdraft facilities to their loyal customers.

4. Is there a condition on the end use of the Overdraft amount?

There is no such condition on the end use of the loan amount under Overdraft. However, salaried individuals cannot use the amount for business purposes.

5. Do they check my credit score to approve an Overdraft facility?

Yes, banks do check your credit score before approving your Overdraft facility.

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