Here’s All you need to know about overdraft facility in India


Overdraft facility is a credit agreement that is made with the bank that allows the account holder to withdraw from the account even if the balance is zero. There is an approved limit given by the bankĀ  within which the account holder can overdraw from the bank.

Most of the financial institutions allow this overdraft facility on current account while some also allow on savings account. Overdraft facilities can be given by only those financial institutions who are granted banking rights by the Reserve bank of India. Under this facility you can continue withdrawing from the account upto the limit given by the bank.

The line of credit or the overdraft limit is given on your current account against the assets such as FDs, shares, bonds and any pre-sanctioned loans. Here is an example to understand how overdraft facility is allowed.

For instance an account holder withdraws Rs. 30,000 from the account, which is surplus of Rs.15,000. So the account is overdrawn to a tune of Rs. 15,000. Due to COVID-19 RBI has allowed moratorium on loan and taking the overdraft facility is also a part of the moratorium. So it is always wise to take an overdraft facility rather than opting for a personal loan.

Availing an overdraft facility on your current account is a kind of loan which needs to be repaid within a particular date. The account holder needs to pay interest on the overdraft amount and the interest on overdraft is calculated based on fixed rate and not floating.

Here is how you can avail overdraft facility on your current account

The overdraft facility is pre-sanctioned to some account holders, while few will have to apply for the overdraft facility on their current accounts.

If you have a pre-approved overdraft offer and have unknowingly withdrawn funds exceeding over and above the available balance, then the overdraft facility automatically gets activated. The onus is upon you to keep a track of the minimum balance that pay back the amount within the stipulated time with the interest rates.

The overdraft facility is also available on joint accounts, and both account holders are responsible for repaying the overdrawn amount. The limit to overdraft amount varies according to the banks and borrowers.

What are the different types of overdraft accounts?

Like any other loans these overdraft accounts are classified under secured and unsecured. In case of secured overdraft the account holders would need to furnish the required collateral while in case of unsecured no collateral is required. Below are the different types of overdraft (both secured and unsecured) available to current account.

  • Overdraft against a housing property
  • Overdraft against fixed deposits
  • Overdraft against an income
  • Overdraft against insurance policies
  • Loan against equity-linked securities

Now that you have known about overdraft, here are a few reasons why it is better than personal loans.

  • The personal loan processing is quite tedius while overdraft facilities can be availed instantly.
  • Failing to repay our personal loans on time affects the credit score while you need to pay interest on the entire personal loan availed. Incase of overdraft facility you can use the amount you need and pay interest only on the overdrawn amount.
  • Availing multiple personal loans may affect your credit score but that it is not the case in overdraft facility.

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