WHAT IS AN OVERDRAFT FACILITY
An Overdraft facility is a credit facility that allows to have surplus money reserved in bank account for any present and future uses without any burden of paying EMI on the same. One can withdraw money anytime they want and repay the withdrawn amount at their convenience. Hence, it is one of the most preferred credit options available to meet varied personal funding requirements without limit with immediate access to funds. The lenders charge a fixed rate of interest over the borrowed amount which is calculated only for the duration of money borrowed and not on the complete tenure of the loan.
FEATURES OF OVERDRAFT FACILITY
Quick and Easy Funds- It is easier to avail funds when someone already have them pre-sanctioned. The facility, thus, makes funding instant and easily accessible to self-employed and salaried individuals.
Approved Credit Limit: It is different for different borrowers. Overdraft is given over a pre-defined tenure with a predefined amount basis the income profile of every individual.
Repayment is not done through EMIs: The borrower can repay the borrowed amount cumulatively. The borrower can either repay the amount partially or fully. The rate of interest is calculated on a daily basis on the borrowed sum. However, the actual interest payment is debited at the month-end.
Minimum Monthly Payment: There is no pressure of monthly repayments with overdraft and one can repay the borrowed amount at the end of the tenure or after a specified time duration.
Interest: Usually the interest is calculated on a daily basis and the interest is charged only on the withdrawn amount.
APPLYING FOR AN OVERDRAFT FACILITY
An overdraft facility is like a loan which the borrower takes from the bank. Banks pre-entitle some customers for availing this facility whereas some customers have to get approval from the bank for availing this facility.
The overdraft facility is activated and the outstanding goes positive as soon as the customers who are pre-entitled withdraw the extra money from their account.
ADVANTAGES OF OVERDRAFT FACILITY
No prepayment charges: Overdraft is a great way to deal with financial emergencies. Banks moreover don’t charge any prepayment charges on overdraft.
0 EMI: The borrower doesn’t always have to repay the overdraft amount in EMIs, instead they can opt to repay the amount used anytime during the duration of the overdraft loan. The only monthly payments will be the interest payments for the amount utilized. With no amount utilized, EMI will be always 0 with no burden of repayment.
Easy Accessibility: Individuals can use overdraft facilities to meet their short term financial needs. The overdraft facility is easily accessible and comparatively cheaper than other loan products.
WORKING OF OVERDRAFT ACCOUNT
Individuals who have a pre-approved overdraft amount can withdraw the extra funds from their account and it will automatically go into overdraft. However, the funds can only be withdrawn up to an agreed limit. As one uses the overdraft facility, one is increasing the outstanding on their bank account and as the deposits are made in the bank, the outstanding decreases. The banks will charge a fixed rate of interest on the amount withdrawn for the duration for which it is borrowed. It may be 1 day or 1 week or 1-month interest. No interest is charged if someone don't use any amount from their overdraft limit.(i.e 0 EMI)
The banks allow the customers to repay the money either partially or fully. There is no need to be bounded in regular monthly installments. As the repayment is done, the borrower again becomes eligible to withdraw the money from their bank account till the overdraft limit is reached upon.
The rate of interest is charged on a daily basis as there is no pre-set schedule of repayment. The borrower can repay the borrowed amount as per his convenience without any prior intimation. The overdraft amount reduces as someone deposit funds in their bank account. And therefore the rate of interest charged also gets reduced. It is calculated on a daily basis because the ledger keeps fluctuating. The interest rate added on a daily basis reflects as cumulative in the monthly statement of the bank account.
COMPARISON OF PERSONAL vs OVERDRAFT LOAN
A personal loan bears EMI payments for the full tenure of loan duration whereas an Overdraft loan bears only interest payment on the amount withdrawn from the account.
Example 1:- Let's suppose Rohan got approved for 1 lakh overdraft limit and 1 lakh personal loan amount each. And he used all 1 lakh loan amount in the next 1 month for both cases. Let us see the difference in the outflows.
|
Particulars |
Personal Loan |
Overdraft Loan |
|---|---|---|
| Approved Loan Amt | 1 Lakh | 1 Lakh |
| Used Amt( in 1st month) | 1 Lakh | 1 Lakh |
| Tenure of loan | 5 Yrs | 5 Yrs |
| Monthly EMI | Rs 2352 | Rs 1208( only Interest) |
Conclusion 1:- Overdraft Loan reduces the monthly EMI obligation by almost 50% !!
Example 2:- Let's suppose Simran got approved for 5 lakhs overdraft limit and 5 lakhs personal loan amount each. And she used 1 lakh loan amount in the next 1 month for both cases. Let us now see the difference in the outflows.
|
Particulars |
Personal Loan |
Overdraft Loan |
|---|---|---|
| Approved Loan Amt | 5 Lakhs | 5 Lakhs |
| Used Amt( in 1st month) | 1 Lakh | 1 Lakh |
| Tenure of loan | 5 Yrs | 5 Yrs |
| Monthly EMI | Rs 11,764 | Rs 1208 (Only Interest) |
Conclusion 2:- Irrespective of the loan amount approved, Simran will only be charged for the withdrawn( used) amount in an Overdraft Loan as compared to higher EMI payments on the whole approved amount in a personal loan.
ELIGIBILITY OF OVERDRAFT FACILITY
Banks offer an overdraft against salary for a salaried individual as well as for self-employed business owners against their annual turnover. Wherein the Salaried Borrower can get approximately up to 16 times of his Net salary per month as a sanctioned overdraft limit, the Self-employed can get a defined percentage of his turnover basis his industry and scope of business. It is also referred to as a short-term loan facility.
It must be kept in mind that the overdraft facility is a great way of meeting the financial emergencies of any individual. But is very important to understand that it is also a loan and shall be repaid as quickly as possible to avoid piling on the base amount with interest.
Finally, Its a Credit limit loan that allows to immediately borrow when in need and prepay whenever someone can all at their convenience! Apply Now!
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