Overdraft

You can take money from your savings or current account using an overdraft facility, even if there is no money in the account. Most financial institutions, including banks in the private and public sectors, offer this feature. An overdraft facility is a form of short-term loan that must be repaid within a specific time frame, per the lender's requirements. According to the terms and conditions set forth by the Bank, lenders must charge the interest rates that borrowers are required to pay. The type of interest rates that the lenders give for overdrafts are both fixed and non fluctuating.

Making a request for an overdraft facility

As previously stated, taking out an instant overdraft is equivalent to taking out a loan from a bank or NBFC. Some clients are given pre-approval by the lender to use an overdraft facility, while others must apply. The overdraft facility is automatically enabled when the pre-entitled customers remove additional funds from their accounts, which causes a negative balance on their account. Customers must make their request to their lender in writing or on the official website if they need the lender's approval to use the temporary overdraft facility. An unsecured overdraft is one that is obtained against a bank account without providing any security, whereas a secured overdraft is one that is obtained with the pledge of collateral.

Features

• Approved Credit Limit: Overdrafts are given when they exceed a set threshold. Each borrower may have a different upper limit.
• Interest Rate: The amount of the utilised overdraft determines the interest rate. It is calculated daily and billed to the account at the end of each month. The interest amount will be added to the principal amount at the month's end and interest will then be computed on the new principal if you fail to settle the overdraft according to the specified timetable.
• Nil prepayment charges: Whenever you want to prepay a debt, a prepayment fee is typically assessed. However, the overdraft facility is an exception. You don't incur prepayment fees when you repay the overdraft amount borrowed. Additionally, you are not required to return the overdraft in EMIs. The total amount borrowed may be repaid.
• Repayment is not done through EMIs: When you have the funds available, pay off the overdraft. You are not required to pay back the overdraft like you would a loan. Equated Monthly Instalments are not required to be paid back (EMIs). You can pay back whatever amount, whenever you want. But if the lender requests a repayment, you will need to comply with that request.
• Minimum Monthly Payment: The amount you owe must be within the overdraft limit even though there is no minimum monthly repayment for overdrafts. Overdraft repayment shouldn't be put off for too long because it lowers your credit score.
• Joint borrowers are allowed on Overdraft: You and your co-applicant are in fact jointly accountable for the entire debt if you take out an overdraft. No matter how much of the overdraft was borrowed, both applicants are accountable for timely repayment of the overdraft. This means that the other borrower will be responsible for paying the entire debt if one of the borrowers is unable to make payments or defaults. No matter how much of the joint borrowers' collateral is overdrawn in this scenario, if a default happens, all of the borrowers' collateral is at risk.
• Workings: Please be aware that when you write a check, your account might not necessarily go into overdraft. There is a potential that your check won't clear the overdraft and may instead be dishonoured, in which case a fee may be assessed to your account.

How does it work

If the bank approves your request for an overdraft account, you will get the requested overdraft amount exactly like you would a loan from the bank. Every time you need money, you can withdraw it from your bank account and it will go into overdraft if you have been pre-approved for the overdraft facility. A predetermined limit on account overdrafts is available. By using the overdraft facility, you essentially raise the balance on your bank account; when you make a deposit, the balance falls.

Your bank will charge interest from the time you borrowed until you paid it back. You can make full or partial repayments to the lender at any time if you have an overdraft. You can again withdraw money from your account as needed until the overdraft limit is reached after paying back whenever you have money. The bank has no collateral against it when a borrower utilises the overdraft facility through his or her bank account.

But it is a secured overdraft if the borrower uses his or her assets as security for the overdraft. These assets can include the money in your account as well as your home, autos, life insurance, fixed deposits (FDs), stocks, and bonds, among other things. Also take note that depending on the collateral, banks may charge different interest rates and permit different overdraft limits. Because the overdraft amount is not paid back according to a predetermined timetable, interest on the overdraft amount is calculated daily. Without the borrower's consent, the borrowed sum may be returned.

Simply making a deposit into your bank account lowers your outstanding balance, which lowers your overdraft limit. As a result, since the borrowed amount ledger can change daily, the interest that applies to the borrowed amount needs to be calculated every day. As previously stated, the overdraft facility is only a revolving source of short-term borrowing. Use this function if you need money to cover expenses and pay them off right away to avoid a buildup of interest payments.

Various Overdrafts

A borrower may be given an overdraft facility on a secured or unsecured basis. Secured overdrafts require collateral to be pledged (asset). If you are unable to pay back your overdraft, the lender may liquidate your belongings to recoup as much money as possible. If the collateral asset is insufficient to meet the cost of the money withdrawn from the overdraft, you will be responsible for the difference. The following list includes several forms of overdrafts:

1. Deficiency against Property

Your home is offered as security for an overdraft facility. Customers with house loans who need money to pay their current home loan repayments can also take advantage of overdraft services. The property is assessed, valued, and surveyed before the residence is approved as collateral. Because of this, overdraft funds that are provided in exchange for property as collateral are not disbursed right away. The authorised overdraft amount is often between 40% and 50% of the value of the property. When providing an overdraft using your residence as collateral, your credit history and repayment capacity are also taken into account.

2. Overdraft protection for FDs

In contrast to obtaining an overdraft sanctioned by holding your home as collateral, getting an overdraft sanctioned against Fixed Deposits (FDs) and life insurance policies as collateral is simple. The time-consuming nature of property evaluation is one of the causes. Anyhow, since the customer has an FD account with the lender and the lender knows the consumer much better, overdraft against FD is desirable for the lender as well. You are eligible for a bigger percentage of the sanctioned amounts—roughly 75%—if you take out an overdraft against your fixed deposit. If you use an FDIC-insured deposit as collateral, the interest rate is also lower. If you keep the FD, banks typically charge you 2% more interest than you are already getting from the FD.

3. Overdraft against Policy of Insurance

The sanctioned amount is determined by the insurance policy's surrender value if it is retained as overdraft collateral. Because the loan to value of the insurance policy is higher than the LTV of fixed deposits, keeping your insurance policy as collateral will result in a larger amount of money being sanctioned from the bank than keeping your FD of the same amount as collateral.

4. Against Equity Overdraft

Although equity is not a preferred alternative for collateral, it is nonetheless feasible to use it to obtain an overdraft facility. Equity is based on the market, hence its value changes for this reason. Because of this, a lower percentage of overdrafts using equity as security are sanctioned.

5. Cash Advance Against Salary

Banks also provide overdrafts secured by salaries for people who are employed. The amount of your overdraft limit may range from two to three times your annual pay depending on the bank. You must have a salary account with the aforementioned bank in order to use such an overdraft. A short-term lending facility is another name for this type of facility. The main source from which banks obtain approval for borrowing limits is the balance sheet for bank overdrafts.

8 Term Loan and Overdraft Differences

Financial institutions offer overdraft facilities that can be used by people with savings or current accounts, salaried people, chartered accountants, business owners, physicians, bank staff, etc.