Frequently Asked Questions about Overdraft Facility
An overdraft facility is a financial service offered by banks that allows customers to withdraw
more money than they have in their account up to a pre-approved limit. This is typically
offered on savings accounts, current accounts, or against fixed deposits.
Generally, individuals with a savings or current account, businesses with current accounts,
and customers with fixed deposits can avail of an overdraft facility. Eligibility criteria include
a good credit score, a stable account history, and income stability.
The overdraft limit is determined based on factors such as the account holder’s credit score,
income, account history, and the value of any collateral provided (like fixed deposits or
property). Banks may also consider the customer's relationship with the bank.
Interest rates on overdraft facilities in India vary depending on the bank, the customer’s
profile, and whether the overdraft is secured or unsecured. Typically, interest rates range
from 10% to 18% per annum. Interest is charged only on the amount utilized and for the
duration it is used.
Common fees and charges include processing fees, annual renewal fees, and penal interest
on overdue amounts. Some banks may also charge documentation fees and legal fees if
applicable. It's important to review the bank's fee structure before availing of the facility.
Repayment of the overdraft amount can be done through deposits into the account. Interest
is typically charged on a monthly basis, and the principal amount can be repaid as per the
customer’s convenience. Banks may also offer automatic debits from linked accounts to
repay the overdraft.
Exceeding the overdraft limit can result in penal charges and higher interest rates.
Additionally, transactions that exceed the limit may be declined, and continued excess usage
can negatively impact your credit score and relationship with the bank.
Overdraft facilities can be both secured and unsecured. Secured overdrafts are backed by
collateral such as fixed deposits, property, or other assets. Unsecured overdrafts do not
require collateral but may come with higher interest rates and stricter eligibility criteria.
Some banks offer the option to convert the outstanding overdraft amount into a term loan.
This can help in structuring the repayment over a longer period with fixed EMIs, which may
be easier to manage. It’s best to check with the bank for specific terms and conditions.
The benefits of an overdraft facility include:
o Flexibility to withdraw funds as needed up to the approved limit
o Interest charged only on the utilized amount
o No fixed repayment schedule, providing ease in managing cash flow
o Helps in meeting short-term financial needs without breaking investments or
incurring high-interest debts
o Quick approval and disbursement, especially for pre-approved customers
o Flexibility to withdraw funds as needed up to the approved limit
o Interest charged only on the utilized amount
o No fixed repayment schedule, providing ease in managing cash flow
o Helps in meeting short-term financial needs without breaking investments or
incurring high-interest debts
o Quick approval and disbursement, especially for pre-approved customers