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Let's get rolling - Overdraft Loan

Overdraft Facility is the facility extended to the borrower in which he can withdraw money from his savings or current account, even if your account balance is zero. This feature is provided by almost all the banks and NBFCs. Interest is levied on the amount withdraw for the stated period for which it has been used by the borrower. Both fixed and floating interest rates are being offered under Overdraft Loan.

Key features - Overdraft Loan

  • Interest Rate: In overdraft loan, the interest is charged on the amount of overdraft used. It is calculated on daily basis and it is billed to the account at month-end.
  • Approved Credit Limit: Overdraft loan amount is awarded over a predetermined limit. The computation of the amount varies from lender lender
  • Nil prepayment charges: In term loan there were pre-payment charges, but in overdraft loan, no prepayment charges were levied.
  • Repayment is not done through EMIs: In overdraft loan the repayment happens whenever you have the money. You do not have to repay in EMIs. You can repay whatever amount you like whenever you like.
  • Minimum Monthly Payment: Overdraft has no minimum monthly repayment.
  • Joint borrowers are allowed on Overdraft: In overdraft loan, joint borrowers are allowed and both of them are responsible for the entire debt. Irrespective of the proportion of overdraft borrowed, both the applicants are responsible for the timely repayment of the overdraft.

Overdraft facility: How does it work?
With the help of overdraft facility, you can overdraw funds through your account up to an agreed limit. By utilizing the overdraft facility you basically increase the outstanding on your bank account; when you deposit funds, the outstanding 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, fully or partially both, whenever you want to. After repaying whenever you have money, you can again withdraw money from your account as per your need until the limit of the overdraft is reached.
Interest on the overdraft amount is calculated daily because the overdraft amount is not repaid as per a set schedule. Just depositing funds in your bank account reduces your outstanding balance and thus reduces your overdraft amount.

Types of Overdrafts
An overdraft facility can be granted to a borrower on a secured or unsecured basis. Secured overdraft is one where you pledge collateral (property).

  1. Overdraft against Property
    Overdraft facility is offered against your house as collateral. The sanctioned overdraft amount is usually up to 40%-50% of the property value. Both credit history and repayment capacity are also considered while granting overdraft against the house as collateral.
  2. Overdraft Facility against Fixed Deposits
    Getting the overdraft sanctioned against Fixed Deposits (FDs) and life insurance policies as collateral is easy in comparison to getting an overdraft sanctioned against property as collateral.. You are eligible for a higher percentage of sanctioned amounts, approx. 75%. The interest rate charged is also less if you keep FD as collateral.
  3. Overdraft against Salary
    Banks offer overdraft for the salaried individuals against the salary. You can get an overdraft limit up to 2-3 times your salary but that may vary from bank to bank. To avail such an overdraft you need to have a salary account with the said bank.

Differences between Term Loan and Overdraft loan
Term Loan - Interest is calculated on a monthly basis and charged on the loan amount. Fixed tenor is granted for repayment. Rate of interest is fixed or floating. Maintaining a current account is not a mandate. Repayment happens thru EMI's.
Overdraft Loan - Interested is calculated on daily basis, and charged only on the utilized loan amount. Overdraft can be availed even if the account balance is zero. Compulsory to maintain a current account. Repayment happens as and when you have funds deposit, no EMI's are there in overdraft loan.

Key terms - Overdraft Loan
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