Overdraft facility

An overdraft facility provided by a lender such as a bank or non-banking financial company 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; more money than what you have in there and when you repay the money, you will also have to pay 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 apply for Overdraft facility?

As aforementioned, 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. Many banks charge a processing fee to the tune of up to 1% to provide their customers this facility.

What are the advantages of Overdraft facility?

Overdraft is a credit facility which you can use in a time of financial emergency. In a loan, when you borrow 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. Through the overdraft facility you can finance your short-term needs. The overdraft facility is usually cheaper and more easily accessible than loans.

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