Overdraft Interest Rates

In an Overdraft, you are charged interest only on the amount you have utilized. You are allowed multiple withdrawals from the OD account up to the limit sanctioned. You can also deposit money into the account whenever you can. So, there are going to be multiple withdrawals and deposits in the account. That is why, for Overdraft limits, interest is calculated based on the ‘Average Daily Balance’ method.

In the average daily balance method, the interest is calculated by considering the balance of a current account at the end of each day or each period. The formula is

Average Daily Balance * APR * Days in Billing Cycle / 365

Now, APR is the interest rate. 

Overdraft interest rates charged by some leading banks and NBFCs

Who are eligible to get an Overdraft Facility?

Overdraft limit is usually availed by business entities to meet their working capital requirements. These days, banks and NBFCs are offering this feature even to regular customers, as a value added benefit. It is disbursed quicker and with minimal documentation, than personal loans or other term loans. The following people can apply for an Overdraft Limit or Facility

• Resident Individuals
• Hindu Undivided Families
• Private and Public Limited Companies
• Senior Citizens or Retired Personnel (above 60 years of age) who are Resident Indians are eligible

What factors determine the interest rate on my Overdraft Limit?

Overdraft limits are predetermined limits, based on your repayment capacity and financial standing. The limits, rate of interest and other terms and conditions are solely determined based on the relationship between the bank and the customer. Customers can get limits starting from Rs. 50,000 up to Rs.5 crores.

How can I improve my eligibility for a good Overdraft Limit?

Maintain a good relationship with the bank. Make sure that you have a good financial standing with the bank on all your accounts.

A healthy credit score: Though Overdraft limits are primarily processed based on collateral assets, a healthy credit score is also required to offer you an overdraft limit.

Have a good repayment history: Make sure that you have a good repayment history on your previous loans and liabilities. A good repayment history means you are a credible customer. That increased your chances of getting a good overdraft limit.

Collateral: Though overdrafts are offered without collateral too, banks prefer borrowers who can pledge considerable collateral against their Overdraft account. Hence, a good collateral can fetch you higher overdraft limits.

How do I repay the amount under the Overdraft Limit?

Overdraft Limits do not have a fixed EMI. You are allowed to repay any amount, any number of times. Interest is calculated on a daily reducing balance method and hence allows you to repay multiple times. This reduces your overall interest burden. You can repay your loan any time without any prepayment charges.

What is the difference between an Overdraft Limit and a Loan?

Different types of Overdraft Limits

Overdrafts against House

Your house may be pledged with the bank as collateral for an Overdraft limit. Some banks give house loan customers overdraft limits, who are seeking funds to cover their current home loan repayments. Before the house is approved as collateral, the property is assessed, valued, and surveyed. The amount of the overdraft is usually up to 40 – 50% of the value of the property. Your credit history and repayment capacity are also taken into consideration when granting house overdraft as collateral.

Overdrafts against Fixed Deposits & Insurance Policies 

It's easy to get the overdraft sanctioned against Fixed Deposits (FDs) and life insurance policies when compared to getting an overdraft sanctioned by pledging your home as collateral. You can get the overdraft limit without any hassle as the FDs are already with the bank. Overdrafts are offered to a maximum of 90% of the FD amount. If you keep FD as collateral, the interest rate charged is also less. Usually banks charge 2 percent more interest than you earn from that fixed deposit if you hold the FD as collateral.

Overdrafts against Equity

Equity is not preferred as an option for collateral but overdraft facility can be availed through it. The reason is that equity is market dependent, and therefore its value fluctuates. The overdraft limit against equity is generally lower compared to other forms of collaterals.

Overdraft against Salary

This facility is gaining popularity with salaried individuals these days. Banks offer overdraft against your salary. This usually works with salary accounts. You can get an overdraft limit of up to twice your salary but that may vary from bank to bank. They usually come as pre-approved offers to the customers based on their salary credit and monthly account usage trends.