What Is Overdraft Facility? All You Need To Know!

By: Bank of baroda
Wed May 15, 2019
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When you open a bank account, you are provided with a bouquet of financial services. The bank provides a cheque book and a passbook to help you manage and maintain your accounts. Furthermore, you are provided with an ATM cum debit card, net and mobile banking facilities and so on. The bank also offers a financial service known as the overdraft facility. But what is overdraft facility? Here’s all you need to know.

What is overdraft facility in bank?

Overdraft facility is a financial facility or instrument that enables you to withdraw money from your bank account (savings or current), even if you do not have any account balance.. Like any other credit facility, the bank levies an interest rate when you avail the overdraft facility. You typically have to pay a fixed interest rate to avail an overdraft limit.

What are the features of the overdraft facility?

Having explained what is overdraft limit, let’s find out its features. These are as under:

  • Banks offer overdraft facilities over a pre-determined limit, which may differ for every borrower.
  • Overdraft limit account is a running account in which you can deposit/ withdraw amount anytime up to the specified limit.
  • The bank levies the interest on the overdraft amount used by the borrower at predefined rate. The interest is calculated daily and billed/debited to your on monthly basis. The interest amount increases if you default on paying the due overdraft amount.
  • Unlike most loans wherein you have to pay a prepayment penalty for repaying the loan before tenure; banks so not levy any prepayment charges on overdraft limits. You can pay off the overdraft amount cumulatively without incurring any prepayment penalties.
  • You can repay the overdraft, in different amounts, whenever you have the money. The system of EMIs, which is prominent with most loans, does not exist in the case of overdraft limits.
  • While there is no minimum monthly repayment schedule in the case of overdraft loans, the amount owed by you should be within the overdraft limit.
  • Joint borrowers may avail overdraft limits. However, both the applicants are equally responsible for repaying the sanctioned Overdraft limit

Different types of collateral accepted by banks against overdraft loans

  • Overdrafts against your house or property
  • Overdrafts against your fixed deposits
  • Overdrafts against your life insurance policy
  • Overdrafts against your equity holdings
  • Overdrafts against your salary

Final word: As is evident, the overdraft facility is one that can truly help you when you need money. Banks also fix decent repayment tenures, so that you can repay the overdraft loan flexibly. However, before availing this facility from your bank, you must ensure that you find out the overdraft facility advantages and disadvantages and then proceed with the limit.

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