Overdraft

An overdraft is a facility provided by a lender such as a bank or non-banking financial company on deposit accounts of their customers. It is a type of loan which you borrow up to the limit permitted through your account with the lender. It basically means that you can withdraw extra money from your bank account past the amount of deposit you have in it. You are charged interest on the amount you borrowed. Please note that the interest rate levied on the borrowed amount, in this case, is fixed and not floating.

How to Overdraft facility works?

Borrowing through overdraft is just like borrowing a loan from the bank. Some customers are pre-entitled to avail the overdraft facility by the lender (bank or NBFC) while some have to take approval. When the pre-entitled customers withdraw extra money from their account, their outstanding goes positive and the overdraft facility is activated automatically. The customers who require the lender’s approval to avail the overdraft facility have to submit their request to their lender either in writing or through the internet banking portal. Overdraft taken against bank account is considered unsecured overdraft while the overdraft where collateral is pledged is considered secured overdraft.

Benefits of Overdraft facility?

Overdraft is a credit facility which you can use in a time of financial emergency. In a loan, a payment schedule is set and you have to pay as per that payment schedule. If you want to prepay a loan, usually a prepayment charge is levied.

However, this is not the case with the overdraft facility. When you repay the amount borrowed through overdraft you do not pay prepayment charges. Also, you need not repay the Overdraft in EMIs. You can repay the borrowed amount cumulatively. The interest is calculated for the time you had the borrowed amount.

The overdraft facility is usually cheaper and more easily accessible than loans.

It is to be noted that the overdraft facility is just a revolving short-term credit facility. Avail it if you need funds in an emergency situation and return them asap so that your interest pay-out doesn’t pileup.