Are you planning to apply for overdraft at bank and are confused what is it? Keep reading to know your solution.
Bank Overdraft: Meaning
A bank overdraft is the sum of money a customer owes the bank after having taken out more money than was in his account. In other terms, a bank overdraft indicates that a customer owes the bank money.
How does Overdraft works?
An overdraft lets you borrow money through your current account by withdrawing more money than you have in the account – going “overdrawn”. There is usually a charge for this. An overdraft is more similar to a flexible kind of borrowing from the bank. Naturally, interest is added to the amount borrowed, but some banks have unique arrangements with certain clientele, such students, under which they provide them with a no-cost overdraft option.
Features:
Banks offer Overdraft amount up to 3 times the current salary of the customer
The facility is offered at minimal documentation and an easy-repay feature
Customers are required to pay interest only on the utilized amount with the flexibility to repay the amount anytime without pre-closure charges
The minimum salary limit varies from Rs. 15,000 to Rs. 1.25 lakh according to specific bank
This type of Overdraft does not require any security or collateral
Some banks even offer Overdraft amounts of up to Rs. 4 lakh, depending upon the salary
Overdraft Protection
An Overdraft Protection provides an additional tool for customers to avoid unsightly gaps that negatively reflect their capacity to pay.
Your checking account is typically linked to a savings account, another checking account, or a line of credit in order for it to function. You won't have a cheque bounced or a transaction or transfer denied because this source is used if there is a deficiency in money. Additionally, it prevents the imposition of a non-sufficient funds (NSF) fee.
Overdraft Fee
Initially, bank charges a one-time processing fee. After then, even in the event of a cash crunch, the bank continues to make payments. A percentage of the deficit sum is added to the initial fee as interest. From bank to bank, this interest fluctuates. There is a per-day limit for the processing fee.
Types of Overdrafts
There are primarily two types of overdrafts – secured and unsecured.
A mortgaged asset or collateral always backs the loan, and if the account holder doesn’t pay off the outstanding sum, the bank has the right to recover the loss by selling off this asset.
On the other hand, the unsecured type is not secured by any collateral and therefore allows a lower credit limit.
1. Authorised Bank Overdraft: An agreement between the account holder and the bank is reached in advance for this kind of overdraft account. The maximum that can be utilised for all payments and the daily, monthly, or yearly service fee—which can vary from bank to bank—are mutually agreed upon by the parties.
2. Unauthorised Bank Overdraft: This kind of overdraft happens when a bank account holder exceeds his available balance without prior authorization, without making any kind of agreement with the bank, or when there has been an agreement made in the past but the overdraft limit has been reached.
Types of overdraft facility
Given below are some of the most common types of overdrafts available:
Overdraft Against Salary: If borrowers hold a salary account with the lending banks, then they can be eligible for a limit of two or even three times their salary amount.
Overdraft on Savings Account: The banks also provide this facility for clients who have active savings accounts with frequent transactions.
Overdraft Against Equity: Keeping the equity as collateral, a borrower can get this facility; however, the permissible limit is significantly less than the market value of those stocks.
Overdraft Against House: Homeowners can also overdraw up to 40-50% of their house’s value.
Overdraft Against Fixed Deposit: An account can be overdrawn up to a certain percentage of a fixed deposit. Generally, the interest rate on such credits is 2% higher than the Fixed Deposit’s ROI.
Overdraft Against Insurance Policy: The facility can also be availed on the grounds of an insurance policy depending upon its surrender value.
Overdraft Against certain security: The facility can also be availed by providing certain security like land or building etc.
Advantages of Bank Overdraft
Handles Timing Mismatch of Flow of Funds.
Helps in managing business cash flow.
Can be withdrawn at short notice.
No collateral required by banks.
Interest is paid only on the utilized amount.
Disadvantages of Bank Overdraft
Higher Interest Rates.
Risk of Reduction in Limit.
Risk of Seizing.
Debtor's Collection becomes Lethargic.
Not suitable for long-term finance
Eligibility
The applicant applying for overdraft facility should be minimum 23 years to 60 years of age. Bank Account – Applicant applying for overdraft facility should have an active bank account. Income – Applicant must have a regular income in
active bank account.
Documents Required for Personal Loan Overdraft
Proof of identity (Passport, PAN card, Aadhaar card, Voter ID card and Driving Licence)
Proof of residence (Electricity Bill, Gas Bill, Passport, or Leave and Licence Agreement)
Bank account statement for the last 3 months.
Overdraft Facility – Interest Rate
The interest rate offered by Bank on OD is calculated only on the withdrawn amount from the total sanctioned limit. It shall vary from lender to lender and depends on the required Overdraft amount, the account balance in your current or savings account, and your existing relationship with the respective Bank.
We hope the above blog was helpful in enhancing your knowledge on the matter. In case of any queries feel free to get in touch with our team of experts.
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Chanda Gupta
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umang@caumang.com
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