What is Overdraft?
Overdraft is a monetary instrument wherein the money can in any case be pulled back from the current or savings account, even if the account balance goes below zero. It is a type of extension of monetary breaking point offered by banks and that money is supposed to be ‘overdrawn’. An authorized overdraft limit is assigned for each customer depending on their relationship with the bank. The customer can pull back money up till as far as possible. Banks do charge interest rate on the money pulled back in type of overdraft.
Overdraft Account – Features
- Overdraft account is a facility that can be availed by keeping up any bank account
- Several private sector banks are currently offering this facility for both compensation and savings account holders.
- The money extension is granted based on customer’s account value, repayment history or credit score
- It is momentary credit provided by the bank that needs to be paid within the stipulated time limit
- Credit sum or overdraft pulls in interest for the time of use which can be from a couple of days to a few weeks.
- Repayment tenure is decided by the bank and it has full authority over the account and its use
- As per the RBI regulations, current accounts and money credit accounts are eligible for a limit of Rs. 50,000 per week.
Overdraft is an essentially useful feature provided by the banks, as it offers help to businesses in terms of income to meet their working capital expenditure. Businesses often have to hang tight for the payments from their clients and this results in delayed payments from their side too. With the help of overdraft in their current accounts, businesses can sign checks for their clients beyond the available assets in their account. This prevents check shame and keeps up the reputation of the business, also.
In the present banking system, numerous banks provide overdraft facility in essential reserve funds and compensation accounts. However, this facility isn’t offered to everyone. Just the customers having a decent reputation in terms of repayment propensities and great credit score are eligible for this facility. Moreover, the overdraft facility requires a certain yearly fee and customers have the option to discontinue the service whenever they need.
Overdraft Account Eligibility
Different Types of overdraft accounts have diverse eligibility criteria for the facility and some of those standards are mentioned here:
Overdraft against Salary: Salary accounts opened by the businesses for their employees are eligible for this facility. The base requirement for benefiting overdraft facility in a compensation account are to have regular month to month pay credit by the organization and the organization being in the endorsement rundown of the bank.
- Banks offer overdraft up to 3 times of current pay of the customer
- The facility is offered at insignificant documentation and easy-repay feature
- Customers are required to pay interest just on the utilized sum with the freedom to repay the sum anytime without pre-closure charges.
- The base pay limit varies from Rs. 15,000 to Rs. 25,000 as per specific banks
- This type of overdraft does not require any security or collateral.
- Some banks even offer overdraft measure of up to Rs. 4 lakhs
Overdraft on Savings Account: Despite being a relatively new concept in the nation, overdraft on sparing account has become quite well known due to being backed by the government. All the bank accounts opened under Pradhan Mantri Jan Dhan Yojna are eligible for an overdraft of Rs. 5,000 or 4 times month to month accent balance (whichever is lower). The accounts must be agreeably operated for a period of a half year to benefit this facility and just a single member of a family is eligible for it. The facility is granted to the earning member of the family, preferably women. The account must be linked with Aadhaar card. This is another obligatory criterion to profit the facility.
The account holder must have another savings account for compliance with the RBI directive too. Minors and KCC (Kisan Credit Card) people are not eligible for the scheme. There is likewise a renewal fee associated to the facility. However, the interest rate can’t exceed 2% above the base rate. This facility does not draw in any processing fee.
Another genuine example of overdraft on sparing account is Citibank Suvidha Savings Account. This is a type of moment money credit which permits you to get moment money up to Rs. 5 lakh. The bank fixes the base EMI sum alongside the interest rate. However, the customer can choose to increase the measure of EMI as per his/her convenience whenever. This scheme does not include a prepayment fee.
Overdraft against Time Deposits: Time deposits, for example, fixed deposits are likewise eligible for overdraft facility. However, few out of every odd bank provides this facility as this is subject to bank’s approach as it were. SBI, offers overdraft facility against time deposits. All the customers having single/joint time deposits, for example, TDR/STDR and RD including NRE/NRO/RFC in any of the SBI branches are eligible for this facility. Customers can likewise apply through Internet banking for TDR and STDR overdraft.
Let’s further examine SBI Loan Against Time Deposit for your reference.
With Nil processing fee, the base sum overdraft is kept at Rs. 25,000 whereas the greatest sum is Rs. 5 crore. The value of the overdraft can’t exceed 90% of the value of time deposit. The interest rate is kept at 1% above the relative time deposit rate. The repayment period is scheduled as per the repayment limit of the borrower and the measure of overdraft. Moreover, repayment period for TDR and STDR ranges from 3 years to 5 years. SBI does not charge any processing fee and prepayment charges also. This type of overdraft is likewise called secured overdraft.
Applying for an Overdraft Facility
As aforementioned, borrowing through overdraft is much the same as borrowing a credit from the bank or NBFC. Some customers are pre-entitled to benefit the overdraft facility by the lender while some have to take endorsement. When the pre-entitled customers pull back extra money from their account, their account balance becomes negative and the overdraft facility is activated naturally. The customers who require the lender’s endorsement to benefit the overdraft facility have to present their request to their lender either recorded as a hard copy or through legitimate website. Overdraft taken against bank account is considered unsecured overdraft while the overdraft where collateral is pledged is considered secured overdraft.
Features of Overdraft Facility in detail
- Approved Credit Limit: Overdraft is awarded over a predetermined cutoff. This cutoff can be different for each borrower
- Interest Rate: Interest rate is charged on the measure of overdraft used. It is calculated on consistent schedule and it is billed to the account at month-end. On the off chance that you default on paying the overdraft as per set schedule, the interest sum will be added to the chief sum at month-end and afterward interest will be calculated on new head
- Nil prepayment charges: Whenever you need to prepay a credit, generally a prepayment charge is levied. However, this isn’t the case with the overdraft facility. When you repay the sum borrowed through overdraft you don’t pay prepayment charges. Likewise you need not repay the Overdraft sum in EMIs. You can repay the borrowed sum cumulatively
- Repayment isn’t done through EMIs: Repay the overdraft whenever you have the money. You don’t have to repay the overdraft sum like you repay a credit. You don’t have to repay in Equated Monthly Installments (EMIs). You can repay whatever sum you like whenever you like. However, on the off chance that the lender demands a repayment, then you should satisfy that demand
- Least Monthly Payment: Overdraft has no base month to month repayment however the sum you owe ought to be in as far as possible. You ought not delay overdraft repayment for long, as it affects your credit score
- Joint borrowers are allowed on Overdraft: If you take an overdraft jointly then you and your joint candidate are both, in effect, responsible for the entire debt. Irrespective of the extent of overdraft borrowed, both the candidates are responsible for the timely repayment of the overdraft. This means on the off chance that one of the borrowers is unable to pay/defaults, then the other borrower needs to pay the entire sum. In such a case, irrespective of overdraft extent of joint borrowers, all collaterals of each of the borrower are at stake if default happens
- Operations: Please note that your account may not naturally go into overdraft when you write a check. There are chances that your check is dishonored instead of going into overdraft and afterward a shame charge might be levied on your account.
How does an Overdraft facility work?
In the event that you get an overdraft account sanctioned from the bank, then you will receive the requested overdraft sum simply like you receive an advance sum from the bank. On the off chance that you are pre-approved for the overdraft facility, whenever you need funds, you can pull back from your bank account and it will go into overdraft. You can overdraw funds through your account up till an agreed breaking point. By using the overdraft facility you essentially increase the extraordinary on your bank account; when you deposit funds, the exceptional decreases. From the time you borrowed until you repaid, you will be charged interest by your bank.
In an overdraft, you can repay money to the lender, completely or halfway both, whenever you need to. After repaying whenever you have money, you can again pull back money from your account as per your need until the constraint of the overdraft is reached.
When a borrower uses the overdraft facility through his/her bank account, the bank doesn’t have collateral against it. However, on the off chance that the borrower takes an overdraft against his/her assets as collateral then it is a secured overdraft. These assets can be the funds in your account and even your house, insurance policies, fixed deposits (FDs), shares, securities etc. Additionally note that the interest rates charged and overdraft sums sanctioned by banks change depending on the collateral.
Interest on the overdraft sum is calculated every day because overdraft sum isn’t repaid as per a set schedule. The borrowed sum can be repaid without earlier suggestion by the borrower. Simply depositing funds in your bank account reduces your exceptional balance and in this way reduces your overdraft sum. Along these lines, interest applicable on the borrowed sum needs to be calculated day by day since the borrowed sum ledger can change every day.
As explained the overdraft facility is only a revolving transient credit facility. Benefit it in the event that you need funds to overcome money related needs and repay them ASAP, with the goal that your interest pay-out doesn’t pile up.
How might one profit an overdraft facility?
So as to benefit an overdraft facility, one can consider the process like taking a specific credit from the banks. The type of asset which is used as collateral that the customer produces before the banks will depends on the frequency of endorsing an overdraft facility from the banks. As every collateral has its own upside and downside, this is pertinent to the whole process.
For example, it takes quite a while for the assent of an overdraft in case your collateral is your home. This is because property evaluation is a very time expending process. Then again, getting through an overdraft sum which has been sanctioned against fixed deposits or a life insurance strategy won’t take a lot of time as the bank will authorize it rapidly.
The money isn’t normally allotted to the customer immediately. It works comparative like a customer’s pre-approved credit. Whenever he need funds, he can begin pulling back money from the overdraft account. What’s more, he needs to pay an interest on the money that he has borrowed. It will be charged for the exact time that he has utilized it.
Is it beneficial for a typical man to benefit overdraft facility?
Considering the numerous purposes for which an overdraft facility can be used, it is worthwhile for a typical man to make use of the services that are offered by the bank. It helps a person overcome a troubled circumstance or a time of grave monetary shakiness in the most hassle free manner. All that the person needs to do is to pay a rate of interest on the overdraft that he has availed, other than which, no other liabilities accrue on him.
The current trends in the realm of banking permit customers to request these service through an online entry also. Most definitely, each bank reserves the option to decide its rate of interest that it intends to charge on the overdraft availed by the bank customer. Overdraft interest rate differs for every person and furthermore varies depending upon the bank. Deciding Overdraft interest rate is the sole discretion of the bank. Therefore, any customer who needs finances on an immediate premise, he can generally search ahead for overdraft facility by the bank to benefit that finance and meet the impending money related needs that may come his direction.
Advantages of Personal Overdraft over Personal Loan
Considering a personal overdraft, the customer is permitted to pull back funds just as repay them at his/her convenience. Moreover, you just need to pay interest on the sum that stays overdue. It means that, you can re-compensate the segment of the extraordinary value whenever there is money in your grasp, and simultaneously pull back certain sum whenever there is a requirement.
Furthermore, in India there are banks which manage overdraft limit that can exceed 2-3 times over the person’s compensation or earnings. Aside from such benefits, there are several other advantages which make personal overdraft a better alternative than personal credit.
- Speedy Fund Release
To access a personal advance, there is a need to satisfy a great deal of paperwork. Moreover, you are will undoubtedly present an agreeable CIBIL score to be eligible to acquire the credit. However, for accessing an Overdraft, you are not required to sit tight for such a long time as everything is managed in a fast method.
When you have completed the underlying set up concerned for an Overdraft, money can be pulled back within few hours. Then again, in the event that you have opted for a Personal Loan, there would be a comparable process every single time when money is transferred and that too under 3-5 business days.
With personal advances, there isn’t a lot of scope for flexibility. The customer is required to pay EMI all through the advance length, with the payments being timely delivered. However, this can become a huge mess for some people, especially for those who need to offer a larger measure of Variable Pay. Hence, a personal credit can’t be seen as an ideal alternative for such circumstances.
Under a personal overdraft, you are allowed to take money based on your breaking point just as pay back as per your convenience. The customer can repay the sum within days or months, depending on their capacity. This makes this alternative quite flexible or elastic.
- CIBIL Score Safety
On the off chance that an individual is frequently profiting or repaying credits, there is a greater chance that his/her CIBIL score may change repeatedly. On the off chance that this happens frequently, then it would be hard for you to get credit cards or advance in the near future.
This condition can be settled by choosing overdraft. Under this facility, you will be offered just a single credit that you are frequently servicing. Hence, this would offer a positive lift to your score.
You can actively contact your bank branch to help you with the details concerned with the overdraft facility. Moreover, the customer care service is another choice that could educate you about different elements associated to overdraft credit.