Wednesday, Jun 07, 2023

Back To Basics: All You Need To Know About Overdraft Facility

Outlook Money

Back To Basics: All You Need To Know About Overdraft Facility

Are you in need of emergency fund? Perhaps you can take an overdraft from your bank rather than a loan. Here’s all you need to know about overdraft facility and how they are different from loans

The usual recourse we take when we are in need of emergency fund is to approach our bank for a loan. But there’s another option, too that we often tend to miss, primarily because we aren’t much aware of it.

That’s the overdraft facility. 

Here are the basics of an overdraft facility and how you too can take advantage of it for your short term requirements.

What Is An 'Overdraft Facility? '

In simple words, it is a facility that allows you to withdraw money from your bank account (savings or current) even when there is no money in it. When you use the overdraft facility, the bank charges interest just like with any other credit facility. 

But to obtain an overdraft limit, you normally have to pay a predetermined rate of interest.

Can We Say Overdraft Is A Loan?

Since the account holder borrows money from the bank or another financial organisation, an overdraft is essentially a loan. 

However, banks only charge interest on the time period during which the money is loaned. For instance, if you had an overdraft of Rs. 5 lakh, but only utilised Rs. 1 lakh of it, the bank would only charge interest on Rs. 1 lakh and not on the entire amount.

Interests Rates On Overdraft Facility 

Only the amount you have used in an overdraft is subject to interest charges. Up to the sanctioned amount, you may withdraw money from the OD account as many times as required. Additionally, you can add funds to the account anytime you may want to. As a result, the account will see numerous withdrawals and deposits. For this reason, the interest is calculated for overdraft limits using the “Average Daily Balance” technique.

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

State Bank of India charges 9.65 per cent on overdraft facility. For HDFC Bank, it is 10.75 - 21.45 per cent. ICICI Bank charges between 10.99 per cent and 18.49 per cent. IndusInd Bank charges 11.25 per cent and Kotak Mahindra Bank between 10.99 per cent and 20.99 per cent, according to 

Who Is Eligible For Overdraft Facility? 

One should be an Indian resident to access an overdraft facility. Besides, he/she must be a salaried or a self-employed individual. The minimum age should be 21 years, and the maximum age should be 65 years. A good CIBIL or credit score gives an added advantage to the borrower.

In addition to salaried employees and self-employed, overdraft facility can also be obtained by private sector businesses, proprietorships, limited liability partnerships, and public or private limited entities.

Importantly, lenders may have different rate of interest and other costs that apply to an overdraft. Additionally, the rate of interest provided by banks and non-banking financial companies (NBFCs) would differ, too. 

One can check the rate of interest on overdraft facility on the official sites of different banks, such as State Bank of India, Bank of India, and HDFC Bank, among others, which extend such facility.

Types of Overdrafts Facility 

Broadly, it is divided into two types – secured and unsecured overdrafts. 

Secured overdrafts are those that are taken against one’s savings or current account, fixed deposit, salary account, or property. These can be further broken down into the following groups:

Overdrafts against house/property
Overdrafts against equity holdings
Overdrafts against salary
Overdrafts against life insurance policy
Overdrafts against fixed deposits

However, for unsecured overdrafts, one doesn’t have to provide any collateral or security against the amount approved.