Overdraft Facility

An overdraft facility lets you withdraw funds from your line of credit at your convenience. You need to pay interest only on the amount withdrawn and utilised. Unlike traditional loans, it has no fixed EMI structure and allows you to repay the borrowed sum anytime.

It is easy to access this facility with a fairly simple process and without much paperwork. In fact, it is an ideal financing solution for small businesses in urgent or recurring need of funds.

Through an overdraft facility, lenders only charge the interest rate on the amount you have withdrawn, and not the total sanctioned limit. Depending on the approved limit of the OD account, you can withdraw money as per your requirements. 

You can add funds to your overdraft account at no extra cost. With multiple deposits and withdrawals, lenders calculate the interest using the average daily balance method. 

Using this technique, the balance remaining at the end of a day or a week determines the OD interest rate for that account. 

Understanding the interest rates associated with these loans is crucial to avoid unexpected costs. Check out the rates levied on this facility by some of the top banks and Non-Banking Financial Companies (NBFCs):

Since lenders calculate the overdraft loan interest daily, it is important to repay it as soon as possible. The interest amount depends on the overdraft loan interest rate fixed by the lender or negotiated by you with your lender.

Here is an example to help you understand this better. Say you took an overdraft loan of ₹50,000 at an interest rate of 12%. Here’s how you can calculate the interest:

• Calculate the interest charged per day with the formula: Withdrawn amount x (12%) x (1/365)

• Here, the interest amount is: 50,000 x (12/100) x (1/365) = 16.43

• You will be charged ₹16.43 per day as interest on the overdraft loan amount of ₹50,000

To enjoy the benefits of the overdraft facility provided by banks and other financial institutions, you have to meet their parameters. The following are the general overdraft loan eligibility criteria:

• Age Criteria: You have to be at least 21 years

• Bank Account Requirements: You must have an account with the bank or a prior relationship with the financial institution 

• Income Criteria: While this varies from one institution to another, lenders prefer you to be employed in a reputed organisation

• Good CIBIL or Credit Score: Although a good CIBIL score is not a crucial factor for getting an overdraft facility, it is considered an added advantage

• Business Vintage: This factor also varies, with lenders preferring a self-employed applicant who has been running a profitable business for many years

Applying for an overdraft facility is simple, easy and hassle-free. Submit the following documents (any one from the ID and address proof categories): 

• Proof of identity (Passport, PAN card, Aadhaar card, voter ID card and driving licence)

• Proof of residence (Electricity Bill, gas bill, passport, or Leave and Licence Agreement)

• Bank account statement for the last 3 months

Understanding the different types of overdraft facilities is essential to make an informed choice. Here are the types of overdraft facility:

Overdraft Loan for Salaried Accounts

To use this credit facility, you must typically have a salary account with the bank. A short-term lending facility is another name for this type of overdraft facility. Depending on the bank, the overdraft limit may vary between two and three times your annual pay.

Overdraft Against a Collateral

You can get this line of credit by pledging collateral. You can pledge an asset like property as security for overdraft loans; thus, the money is not disbursed right away. The lender assesses, values, and surveys the property before approving it as collateral.

Overdraft Against Stocks or Equity

Although stocks or equity may not be a favoured alternative for collateral, you can use them to get an overdraft loan. However, as equity depends on market conditions, its value keeps fluctuating. So, the proportion sanctioned for overdrafts using equity as security is less.

Overdraft Against Insurance Policies/FDs

Getting approval on an overdraft loan is easy using fixed deposits and life insurance policies as security. If you get an overdraft facility against an insurance policy, the sanctioned amount depends on the surrender value of your policy.

Most banks and NBFCs allow you to get access to funds through this facility by applying online. You can easily apply for an overdraft facility by following these steps:

• Step 1: Visit the website of the lender

• Step 2: Fill in your personal, financial and employment details

• Step 3: Select the loan amount from the range approved for you and the loan tenure 

• Step 4: Receive the amount after the loan approval as per the terms specified by the lender

Before getting a loan, it is essential to understand its features to help you make the right choice. Here are a few key differences between a term loan and an overdraft facility:

• To get an overdraft loan, you must have an existing account with the lender. There are no such requirements for a term loan. You can get only a fixed amount for a specific tenure with a term loan, which is not the case with the OD facility.

• While the lender sets a predetermined limit on an OD loan, you can get considerable funds in a term loan.

• Lenders charge interest rates only on the withdrawn amount in an overdraft facility. However, you have to pay the interest on the entire sanctioned loan limit in a term loan.

• While you can access funds for a shorter timeline in an overdraft facility, the tenure of a term loan varies between 1 and 15 years. 

• An overdraft facility helps you manage daily expenses. However, a term loan is ideal for significant investments such as purchasing machinery and related uses.

• You can repay an overdraft loan at your discretion. However, you can repay a term loan only as per the schedule. 

Reference of all T&C necessarily refers to the terms of the Partners as regards to pre-approved offers and loan processing time amongst other conditions.