Overdraft Facility: Features, Types and How to Apply?

Managing finances can be a challenging task, especially when unexpected expenses arise. This is where an overdraft facility can prove to be a valuable financial tool. Read on to find out more about this feature.

An overdraft facility is a financial arrangement provided by banks that allows you to withdraw more money from your savings or current account than the available balance, up to a predetermined limit. Offered by several Public Sector and Private banks, this facility works as a short-term loan you can repay in a pre-decided tenure. Essentially, it serves as a cushion to cover temporary financial shortfalls, preventing your transactions from being declined and helping you avoid costly overdraft fees.The overdraft facility was earlier offered only to current accounts meant for business transactions. However, most bank account holders, irrespective of the type of account they hold, can now avail of this facility. The overdraft facility is available to• Salary account holders• Deposit account holders• Current account holders• Savings account holders Also read : Savings account vs. current account

Credit Limit:

The overdraft facility comes with a predetermined credit limit, which is the maximum amount you can withdraw from your account without facing penalties. This limit can vary from one borrower to the next. You can withdraw the amount as and when you need it.

Flexible Payment:

Overdrafts usually do not have fixed payment schedules. You can repay the overdraft when you have the funds, unlike a loan, which may have a repayment schedule in the form of Equate Monthly Instalments (EMIs). An overdraft facility gives you the flexibility of paying the amount as per your convenience unless demanded by the lender. This facility also does not have a minimum monthly payment, however the amount you owe must be within the limit.

Interest:

Banks generally charge interest on the overdraft amount at a predefined rate. Calculated daily, this amount is billed to you at the end of the month. If you default on paying the due amount, it will lead to an increased interest amount.

Prepayment Charges:

Most loans attract a prepayment penalty if you repay before schedule. However, this is not the case with an overdraft facility. If you repay your due overdraft amount cumulatively, you still do not incur any prepayment charges.

Joint Borrowers:

You can use the overdraft facility jointly with another applicant; however, you and the joint applicant are equally responsible for the entire amount. Therefore, if one borrower is unable to pay, the other borrower is liable to pay the entire amount. And in case you or the joint applicant default on the payment, all collaterals are at stake.

You can avail of the overdraft facility on a secured or unsecured basis. If you choose the secured route, you will need to pledge a collateral. If you cannot repay your overdraft, the lender can recover the amount through your assets (collateral). The different types of collaterals are as below:

Overdraft against salary:

If you are a salaried individual, you can opt for the overdraft facility against your salary. Though the amount may vary from bank to bank, you may get an overdraft limit of up to 2-3 times your salary. You need to have a salary account with said bank to avail this facility.

Overdraft against property:

You can avail of the overdraft facility using your home as collateral. You can also do so if you have an active home loan and need funds to settle your existing home loan payments. Overdraft offered against property typically has a limit of 40-50% of the property’s value.

Overdraft against fixed deposits:

Using your fixed deposit as collateral is generally a better option than your property. Some advantages are quicker processing, minimal documentation, lower interest rates, and the limit sanctioned can be almost 75% of your fixed deposit. Additionally, if you have the fixed deposit with the same bank, the process is even quicker.

Overdraft against insurance policies:

Using your insurance policy as collateral is another great choice. In such cases, your overdraft amount will depend on the surrender value of your policy. The surrender value is the amount you receive from your insurance company if you choose to terminate your policy before maturity.

Overdraft against equity investments:

You can use equity as collateral; however, it is best to use it as a last resort. Since equity depends on the market, its value may fluctuate. You may therefore get a lower overdraft limit against equity as collateral.

If you already have a pre-approved overdraft facility, you can withdraw an amount that exceeds your account balance, following which the overdraft facility will be automatically activated. If not, you can contact your bank and complete a quick application process online, for instant approval.An overdraft facility can be a lifeline during times of financial strain, preventing declined transactions and costly overdraft fees. It is widely available through various financial institutions, from traditional banks to online options and credit unions. However, securing an overdraft facility requires careful consideration of your financial situation and the terms offered by the provider.When using an overdraft, always prioritise responsible financial management, repaying the overdraft promptly, and staying within the agreed-upon limits. By understanding the ins and outs of overdraft facilities, you can make informed decisions to better manage your finances and navigate unexpected expenses with confidence. Also read: Personal Finance Tips For Better Money Management