Overdraft facility is a financial instrument that helps you ease your debts and get your finances back on track. This facility offers you a credit line that is extended to you on your existing bank account. An individual can withdraw funds from the credit line up to the credit limit sanctioned to him. This limit is granted by the lender based on the account value and creditworthiness typically to current and business accounts. Various lenders now provide an overdraft facility for salaried professionals too.This facility is designed to provide assistance for your immediate financial needs for which your liquid funds may be insufficient.
How does an Overdraft Facility work?
Overdraft is a form of debt wherein you can make multiple withdrawals from your credit line and pay off as and when you have the liquidity. You will have to pay interest only if you use the facility, i.e., only on the amount you withdraw. Moreover, interest will only be charged on the utilized amount for the period the funds are borrowed. For instance, you have an overdraft facility for INR 2,00,000 and you use only INR 40,000 from that, then you are liable to pay interest only on INR 40,000 and not on the entire sum of INR 2,00,000.
This overdraft facility was traditionally only extended to businesses who need working capital to meet their cash flow. This facility is now even available for salaried professionals, known as a personal overdraft.
What are the Types of Overdraft Facilities Available in India?
There are various types of overdraft facilities provided by the banks & NBFCs on secured and unsecured basis. Some of them are listed below:
Personal overdraft facility (For Salaried)
Any salaried individual with a monthly salary more than INR 30,000- 40,000 is eligible to apply for this facility. The amount sanctioned with overdraft for salaried, will depend on your eligibility and creditworthiness. The amount available ranges between INR 1 lakh to INR 10 lakh. You are required to pay interest only on the utilized amount and repay the amount without any pre-closure charges.
Overdraft against Time Deposits
This type of facility is also called secured overdraft as it is provided against a collateral. Some banks provide overdraft facilities against fixed deposits. The value of overdraft does not exceed 90% of the value of time deposit. Processing charges and pre-payment charges vary from bank to bank. Banks usually charge one percent more than the fixed deposit rates for the overdraft against fixed deposit.
Overdraft Against Asset
The banks provide overdraft facilities against an asset, such as real estate property (house). The asset is used as a collateral after valuation and then the overdraft amount is sanctioned. Usually this amount is around 40%-50% of the property’s worth. This facility is also extended to individuals looking for funds to settle their existing outstanding home loans.
Overdraft against insurance policy and equity
Banks also provide overdraft facilities against insurance policies, shares, and bonds. The rate of interest differs for each of these collaterals. Also, the amount offered may vary from one asset to the other. For overdraft against insurance policy, the banks consider the surrender value of the policy for setting the overdraft limit.
Like any other personal loan, overdraft facility works well for any planned event or a long tail expense like home renovation, medical emergency, car repairs. It helps you keep a backup so that you can withdraw as and when you need the funds without going through the hassle of applying for a loan again and again.
