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Introduction

Banks and Financial Institutions offer various value added services to their customers. Though traditional term loans are still one of the major offerings, Overdraft Loan is gaining popularity these days. Overdraft Loan is no longer restricted to business entities. Even salaried individuals are now eligible to get this facility based on their financial standing with the bank. Many borrowers are leaning towards this facility owing to its hassle free, minimal documentation & quick disbursal features.

What is an Overdraft Loan?

Overdraft Loan is a credit facility or instrument that allows you to withdraw money from your bank account, even if you have no account balance. Like every other credit service, when you use the overdraft facility, the bank levies an interest rate. Generally, the banks charge a fixed interest rate on these overdraft limits.

The unique feature of an Overdraft Loan is that you are charged interest only on the amount you utilize. This gives it an advantage over personal loans where you are charged interest on the entire amount from the date of disbursal.

Overdraft loans are not commonly known among the public due to the bank’s discretion in determining eligible borrowers. One needs to have been a loyal customer of the bank with a good credit score and a healthy financial standing. Your repayment history on other loans is also considered before rolling out the offer to you.

Benefits of Overdraft Loans:

  • Simple documentation and quick disbursal compared to other kinds of personal loans or term loans.
  • Multiple withdrawals up to the limit of Overdraft. You need not utilize the amount in a single shot. You can make multiple withdrawals as per your needs.
  • You pay interest only on the utilized amount. Though you may have a higher overdraft limit, interest is charged only on the amount you have withdrawn.
  • Flexible repayment options; Overdraft Loans 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 pre-closure charges. 
  • Many banks go for simple credit assessment based on your account statement.

What are some of the features of an Overdraft Loan?

  • Overdraft loans are offered as a predetermined limit, based on your repayment capacity and financial standing.
  • Overdraft limit account is an operating account where you can deposit / withdraw money up to the defined limit anytime.
  • The interest on your overdraft balance is at a predefined rate. The interest is calculated on a monthly basis daily, and billed / debited to you. The amount of interest increases if you default on paying the amount due overdraft.
  • Though there is no fixed EMI or auto debit from your account, your withdrawals from the overdraft account should be within the prescribed limit.
  • Overdraft loans can be availed by Joint Account holders too. Both the account holders are held equally liable to repay the loan amount.

How does an Overdraft Loan 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.

Different types of collateral accepted by banks against Overdraft Loans

  • Overdrafts against your house or property
  • Overdrafts against your fixed deposits
  • Overdrafts against your life insurance policy
  • Overdrafts against your equity holdings
  • Overdrafts against your salary

How much Overdraft Loan can be availed?

As stated earlier, the loan amount and other terms are primarily determined by the bank on a case to case basis. Some banks offer Overdraft loans of up to Rs.1 crore to business entities or professionals.

  • 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.

Overdraft Loan FAQs:

1. Who can offer Overdraft Loan to consumers?

Previously, only banks used to offer Overdraft Loans to business entities to manage their cash flow requirements. But in recent times, even NBFCs have adopted this product for their consumers. These days, even individuals are being offered this facility as a value added service.

2. What kind of repayment tenure is offered on Overdraft Loans?

Repayment tenure is determined by the bank on a case by case basis. The repayment tenure generally starts from 12 months to a maximum of 60 months.

3. What is the interest rate on Overdraft Loans?

Overdraft Loans have similar interest rates as Personal Loans. Banks are offering interest rates starting from 11.25% up to 22%, based on your eligibility. These loans usually come with a fixed rate of interest. However, interest is calculated on a Daily Average Balance method, reducing the overall interest burden.

4. How does one apply for an Overdraft Loan?

Overdraft Loans are generally offered as pre-approved offers to customers, who then contact the bank to avail them. If you have not received any pre-approved offers, you can contact the bank branch or apply online through their website.

5. What is the difference between a Personal Loan and an Overdraft Loan?

Overdrafts and Personal Loans are both loan products from the bank. They both give you a credit line and charge you interest for that. However, in an overdraft facility, interest is charged only if you utilize the overdraft limit. Also, interest is charged only on the amount utilized. But in personal loans, interest is charged from the day the amount is disbursed. Also, interest is charged on the entire loan amount.

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