Overdraft Facility

An overdraft loan allows you to use funds from your approved credit limit without applying for a new loan each time. You pay interest only on the amount utilised, making it a flexible and cost-effective option for managing short-term working capital or personal expenses.

An overdraft loan facility is a revolving credit arrangement that lets you withdraw money beyond the balance available in your account, up to a pre-sanctioned limit. It is a flexible form of overdraft lending that allows you to borrow, repay, and reuse funds within your approved limit.

Interest is charged only on the utilised amount, based on the applicable overdraft loan interest rate set by the lender. Eligibility depends on factors such as income, repayment capacity, and banking relationship, commonly referred to as overdraft loan eligibility.

This loan for overdraft offers liquidity and financial flexibility, suitable for both business and personal requirements.

Lenders typically calculate interest on overdraft loans daily, making it crucial to repay as soon as possible to minimise costs. The interest you pay depends on the overdraft loan interest rate set by the lender or agreed upon during negotiations.

To help you understand, here’s an example:

Let’s say you took a loan on overdraft of ₹50,000 at an interest rate of 12%. Here’s how you can calculate the interest:

Formula for daily interest:

Withdrawn amount × (Interest rate) × (1 / 365)

Where, 

• Withdrawn amount: The amount you have borrowed via the overdraft loan

• Interest rate: The annual interest rate set by the lender, expressed as a percentage

• 1 / 365: This factor calculates the interest charged per day, assuming a 365-day year

For our example:

₹50,000 × (12% / 100) × (1 / 365) = ₹16.43

So, the interest charged per day will be ₹16.43 for the overdraft loan amount of ₹50,000.

You can also use an OD loan calculator to quickly estimate your interest charges based on the amount withdrawn and the interest rate.

Types of Overdraft Facilities

Understanding the different types of overdraft facilities is essential for making an informed choice. Here are the main types of overdraft facilities available:

1. Secured Overdraft (Against FD, Property, or Shares)

This type of overdraft is secured by collateral such as Fixed Deposits (FDs), property, or shares. The lender offers the credit facility after evaluating the pledged asset. The overdraft limit is usually higher for secured overdrafts, as the risk to the lender is mitigated by the collateral.

The interest rate for secured overdrafts is often lower than that of unsecured ones because the lender has a guarantee of repayment in the form of the pledged asset. This makes it an ideal option for those with valuable assets to pledge and who need higher credit limits.

2. Unsecured Overdraft (Based on Income or Creditworthiness)

An unsecured overdraft is offered based on your income or creditworthiness, without the need for collateral. This type is ideal for individuals who may not have valuable assets to pledge but still need access to funds.

Interest rates for unsecured overdrafts are typically higher than secured overdrafts because the lender is taking on more risk by not having collateral. The loan amount is typically limited and based on the borrower’s income, credit history, and banking relationship.

3. Overdraft Loan for Salaried Accounts (Salary Account Overdraft)

To access this facility, you need to have a salary account with the bank. The overdraft limit for salaried accounts is typically based on a multiple of the borrower’s annual salary, with most banks offering limits of two to three times the salary.

Since this type of overdraft is unsecured and based on the income of the borrower, the interest rate may be slightly higher compared to secured overdraft options. However, the quick approval process and ease of access make it a popular choice for salaried individuals.

4. Overdraft Against a Collateral

This overdraft is secured by property, such as real estate, or other valuable assets. The bank assesses the value of the asset before sanctioning the overdraft.

Since this is a secured loan, the interest rates are generally lower compared to unsecured overdrafts. The collateral reduces the lender's risk, which can result in more favourable loan terms for the borrower.

5. Overdraft Against Stocks or Equity

An overdraft facility can also be secured by stocks or equity. However, the market value of these assets fluctuates, which makes the overdraft amount lower compared to other secured overdrafts.

The interest rate for equity-backed overdrafts can be higher than for property-backed overdrafts because the value of equity is more volatile, posing a higher risk to the lender.

6. Overdraft Against Insurance Policies or Fixed Deposits (FDs)

Pledging insurance policies or Fixed Deposits (FDs) is another way to secure an overdraft. The overdraft limit is based on the surrender value of the insurance policy or the amount of the fixed deposit.

Since this is a secured option, the interest rates for overdrafts against FDs or insurance policies tend to be lower than unsecured overdrafts. These loans are relatively easier to access and offer a higher credit limit for individuals with existing assets like FDs or policies.

7. Personal Overdraft Facility

A personal overdraft is offered based on your creditworthiness and income, with no collateral required. This is an unsecured loan, meaning the overdraft lending rate will typically be higher than for secured overdrafts. Personal overdrafts are ideal for those who need quick access to funds for personal emergencies or short-term needs.

8. Business Overdraft Facility

Business overdraft facilities are tailored to help businesses manage their working capital requirements. These overdrafts are usually based on the business’s income and assets, as well as the owner’s creditworthiness.

The interest rates for business overdrafts are typically higher if the facility is unsecured. However, businesses with valuable assets or strong cash flow can secure lower rates through secured overdrafts.

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):

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:

1. Visit the website of the lender
   
   

2. Fill in your personal, financial and employment details
   
   

3. Select the loan amount from the range approved for you and the loan tenure
   
   

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:

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