Personal Loan Overdraft Facility: Features, Benefits & Eligibility

A personal loan overdraft is a credit facility given to any pre-existing personal loan customers. The pre-existing customers can withdraw funds as per their sanctioned credit limit on the loan account. The lenders decide the interest to be paid and the amount to be sanctioned.This lending rate is decided by considering a few factors like monthly income, cash flow transactions of the borrower and their credit profile of the customer. In a personal loan overdraft, the interest is charged on the amount availed and not on the entire amount. Due to this reason, it is preferred by people who take frequent loans or have regular cash crunches but have the bandwidth to repay these loans on time.

A personal loan overdraft has many features, some of which are as follows:

1. Withdrawals can be made several times from the pre-sanctioned loan amount. These withdrawals on the pre-approved overdraft amount can also be done against a salary account or any bank account.
2. The repayment can be at the person's (applicant) convenience. However, the maximum time that can be taken is 2 years, not beyond that.
3. The overdraft amount is decided according to the customer (applicant) and the lender's existing relationship.
4. The lender decides the tenure for the repayment. Sometimes the lender or the bank may extend the tenure if the relationship between the lender and the customer is healthy.
5. Salaried as well as self-employed people can avail personal loan overdraft.
6. The interest is charged only on the amount withdrawn or utilised.
7. Personal loan overdraft is a type of short-term loan that can be used to meet immediate or urgent requirements.
8. No preclosure charges are applicable on the overdraft loan.
9. No extra collateral is required to avail of this overdraft, if it is pre-approved.

Besides meeting your immediate requirements, the personal loan overdraft has many more benefits. Some of them are as follows:

1. Flexible: The person availing of this facility can withdraw only a partial amount of the overdraft loan available. The interest is charged only on the withdrawn amount, not the approved overdraft amount. For example - if the approved overdraft limit is Rs. 50,000 and the person avails only Rs 30,000. Interest will be charged only upon Rs 30,000 and not upon Rs. 50,000.
2. The rate of interest: Personal loan overdraft is suited for people who have the bandwidth to repay the overdraft loan amount in a short period (maybe 3 or 4 months). This lending rate depends on the previous transaction history and a goodtrack record of the applicant. Any lender or bank will offer a competitive interest rate, provided the applicant has a credit score and the relationship with the lender or bank is a healthy one.
3. Instant and hassle-free cash: It helps an individual to meet an immediate cash crunch, which can either be a personal need or cash needed for an emergency. This overdraft facility can be availed against a saving account, pre-approved loan , fixed deposit or a salary account.
4. No EMI (Equated Monthly Installment) option: An individual doesn't have to keep track of the monthly instalment. So there is no chance of missing out on EMI or a cheque bounce due to insufficient funds. The repayment is according to the convenience of the applicant. The repayment can be made either in a lump sum or in small amounts depending upon cash flow of the applicant.

Also Read: Best Ways to Pre-closure Charges for Personal Loan

The following criteria have to be met to be eligible for a personal loan overdraft:

1. The person availing of this facility should be an Indian citizen.
2. Should be a self-employed individual or a salaried person.
3. Anyone above the age of 21 years is eligible for it
4. People above 65 are not eligible to apply for a personal loan overdraft.
5. The applicant should have availed of a previous loan with the lender.
6. An advantage would be to have a good credit score. Although it is not needed for taking an overdraft on a personal loan.
7. Apart from individuals, many firms are also eligible for personal loan overdrafts. Such firms can be Public Sector Firms, Limited Liability Partnerships, Proprietorship Firms and Public or Private Limited Entities.
8. Giving the personal loan overdraft is entirely the lender's decision. The lender also decides the applicable rate. Both these things vary from lender to lender.
9. Private/Public sector companies, Professionals, Salaried doctors, and Employees of State, Central and Local Governments are also eligible for personal loan overdrafts.

The documents required to avail of the personal loan overdraft are as follows:For salaried individuals

1. ID Proof - a copy of any of these (PAN card, Aadhaar card, Driving licence, Voter ID).
2. Address Proof a copy of any of these (electricity bill, passport, gas connection receipt or gas bill, lease or rental agreement, landline bill).
3. Bank statement for the last 6 months
4. Signature Proof
5. ITR/Form16
6. Salary slip of last 3 months

For self-employed individuals

1. Business proof
2. Last 2 years ITR, along with profit and loss (P and L) account
3. Balance sheet and last 2 years income computation
4. Form 26 AS
5. ITDS certificate (Form 16 A) OR Income tax challan for income tax declared.

Also Read: 3 Tax Benefits Of Personal Loan

Through online mode:

Step 1 : Visit the lender's website. Step 2 : Fill in all the relevant details like personal, employment and financial. Step 3 : Select the loan amount that has been pre-approved. Step 4: Select the tenure for the loan amount. Step 5: Submit the required documents. Step 6 : Submit bank details like the name of the bank, bank account number, and IFSC code of the bank. Step 7 : Once approved per the lender's terms, it will be received within 24 hours in the bank whose details were submitted.

Through Offline mode

Personally visiting the lender's office and out out filing the form with the relevant details. Submit the necessary documents and a cancelled cheque to the lender and specify the amount and tenure. The loan will be deposited in the account within 24 hours.

Personal loan overdrafts are offered to an individual based on the balance in their savings account, their previous credit history and their association with the bank or the lender. They are also based on assets held by the person such as fixed deposits, property, bonds and shares etc. that can be kept as collateral.Personal loan overdraft works just like a pre-approved loan. The amount of money needed can be removed from the account as and when required. The repayment is also at the borrower’s convenience, it can be repaid in part of in full. Once the repayment of this entire amount is done then the person can become eligible for another overdraft loan. If the amount availed is lesser than the sanctioned amount then the person can keep withdrawing till the sanctioned limit of the overdraft loan is reached.

The loan value is determined by the lender or the bank. Some banks offer an overdraft loan of up to Rs 1 crore. These are usually given to business corporations and professionals. Some of the amounts available to different categories of people are:

1. If a person has fixed deposit , then the overdraft loan would be 75 to 80% of the fixed deposit amount.
2. Against house property a person can get 40 to 50% of the value of the house property as an overdraft.
3. Salaried individuals can get 2 to 3 times the monthly salary given as an overdraft.
4. Businessmen with invoice receivables can get an overdraft of 90 % of the invoice value.
5. An Insurance policy holder can get the surrender value of the insurance policy. As compared to fixed deposit the overdraft loan that can be given is more if overdraft is based on the insurance policy.
6. If equities are kept as collateral then the overdraft is quite less as equities are linked to stock market .

The overdraft comes in handy when a person is facing a cash crunch and is getting loans at an exorbitant interest rate. There are 2 types of overdraft loans - a secured overdraft and an unsecured overdraft.Some of the ways of obtaining a secured overdraft loan are as follows:

1. Overdraft loan for salaried people: To avail of this facility, the salaried person must have an account with that particular bank. This loan is also called a short-term lending facility. The overdraft limit maybe 2 or 3 times the annual salary. It, however, is different from one bank to the other.
2. Overdraft against equities/ stocks: Stocks that a person buys can be used for taking an overdraft loan. There are better options for keeping it as collateral. The amount dispersed for overdraft loans is relatively less as the stocks/equities depend on the markets, which are quite volatile at times. The value of the stocks keeps changing.
3. Overdraft loan against collateral: The Overdraft loans can be availed by pledging collateral. An asset like a property can be kept as collateral. This property will first be assessed and valued depending on the location, how many years old the property is and the conditions of the property etc. Only after that it will determined if it can be kept as collateral and the overdraft amount that the property owner is eligible for.
4. Overdraft against fixed deposits and insurance policies: If a person holds a life insurance policy or has a fixed deposit, it becomes effortless to avail of the overdraft facility. The surrender value of the insurance policy determines the amount of overdraft loan that can be sanctioned to the person (who is the policyholder).The overdraft loan can be decided based on the fixed deposit amount, tenure, and maturity amount. In fixed deposits, the money is invested for a period, which gives guaranteed returns. Furthermore, the chances of having a good relationship with the lender increase when an investment is made.

On the other hand, unsecured overdraft loans are pre-approved overdraft loans. They may also be overdraft loans that do not require an individual to keep any collateral to avail of this facility. Also Read: What Is The Salary Requirement For Personal Loan?

An individual who wants a loan should compare the features of a term loan and an overdraft loan. After this, they should decide which one to go with, depending upon the financial requirement.

1. An overdraft loan is a line of credit. To avail of this loan, the borrower must have an existing loan with the lender. Whereas a Term loan is borrowed capital where the loan is sanctioned based on a few factors like salary, returning capability etc., these loans are for a fixed amount that has to pay in a stipulated time.
2. Overdraft loans are flexible, not requiring EMIs (Equated Monthly Installments), and the tenure depends on the borrower. Whereas a Term loan is flexible, the borrower has a fixed tenure and must pay EMIs (Equated Monthly Installments).
3. Overdraft loans are short-term credits. These loans can be taken for a maximum of 2 years. Whereas, Term loans can be short or long-term credits as the tenure of the loan varies between 1 to 15 years.
4. The interest paid in the Overdraft loan facility is only on the amount availed. In comparison, the interest has to be paid on the entire loan amount in a Term loan.
5. The interest for an Overdraft loan is calculated daily. Whereas in term loans, the interest is fixed every month. This interest on a term loan is adjustable.
6. Overdraft loans depend significantly on the relationship between the lender and the borrower. The Overdraft loan facility may or may not charge a processing fee. At the same time, a one-time processing fee is applied on availing of a Term loan.
7. Overdraft loans do not have any preclosure charges. In comparison, preclosure charges are applicable in Term loans. These are charged when the borrower intends to close the loan before the stipulated period.
8. A pre-determined limit is fixed by the lender in case of Overdraft loans. Whereas in Term loans amount limit is not fixed, huge loans can also be sanctioned depending upon the borrower's transaction history.
9. Overdraft loans help manage daily expenses. In comparison, a Term loan is usually taken for a significant purpose (like buying something that requires considerable capital).

Also Read: 5 Questions To Ask Before Applying For A Personal Loan

The banks and lenders have discretion on giving overdrafts on personal loans. That is why a person wanting funds regularly due to a temporary cash crunch should have a healthy relationship with the lenders and the banks. This healthy relationship between the two will make it easier for the applicant to avail the overdraft amount and fulfil the eligibility criteria. The final decision regarding the personal loan overdraft is entirely in the hands of the lender or the bank. Overdraft loan is not commonly known to many people. An individual seeking personal overdraft loan must avail it only if the repayment of this loan is possible.