Is your bank account needing immediate funds, but your credit history and credit score aren’t good enough to get a personal loan? If so, an overdraft loan from your bank or credit union may be the answer. An overdraft gives you instant access to cash when you don’t have enough money in your account to cover transactions. You can use the funds for whatever you need them for–holidays, birthday gifts, home repairs, or anything else you need emergency cash for. The money will clear the same day you get approved for the overdraft, provided it’s within a business day.
In simple words, an overdraft loan can be used if you are in need of short-term funds. These loans provide borrowers instant access to emergency funds and can be used for any expense, from unexpected bills to emergency car repairs. Before turning to a payday loan, consider an alternative such as an overdraft loan.
What is an OD in a Bank Account?
Overdraft facility is available in most banking institutions. An overdraft is a limited form of loan, which allows an account holder to withdraw more money than is deposited in the bank account. The borrower pays an additional fee for the bank to borrow money from another financial institution on his behalf. The ability to overdraw is based on the limit of funds that has been arranged by the bank or lending institution; they charge their clients a service fee each time they go over the agreed limit. They are also referred to as an overdraft limit, overdraft line of credit, or a cash overdraft. In order to be eligible, you must have a good credit history and a substantial savings account.
How does OD in a Bank Account work?
When a Current Account is registered with an overdraft facility it provides you with an opportunity to withdraw more than what is actually available in the current account balance. However, you would be required to repay the sum taken from the bank at the end of a stipulated period of time. This is a valuable feature for occasional expenditures such as making payments for utility bills, etc.
What are the benefits of OD in a Bank Account?
Manages Cash Flow – If you are running a successful business, nothing can kill it like a slow cash flow. It all starts with someone asking for something that you really need. And then there is the other urgent need which has come up as well. If you feel like your company’s cash flow is in danger of running dry, then consider overdraft protection. Knowing whether or not an overdraft is a good idea for your business depends on many factors: industry and local market, income and expenses, personal credit history, and habits.
Dealing with Urgent Cash Requirements: Have you ever run out of cash and left high and dry, unable to pay an important bill, and so on? Yes, we all have been there. That is why it would be better if you stay prepared by enrolling in a bank overdraft facility. This means that even if you don’t have enough money in the account when the transaction takes place, the bank will go ahead and process it anyway.
Pay Interest Only on the Used Amount
The concept of Overdraft in a Bank Account is often misunderstood. People often think they will be charged extra when they overdraft the account but that isn’t always the case. It all depends on the bank, but most banks have various ways to make money off overdrawn accounts. Interest is paid only on the utilized amount. This is because banks do not pay the interest on the amount which has been withdrawn or transferred but only on the amount that has been utilized (i.e. deposited or spent).
Can be Withdrawn Even at Short Notice
Overdrafts have become a handy way for many people to manage their spending. This is due to the fact that it does not have the same strict rules or requirements that other types of borrowing have. Unlike a loan application, which takes several weeks to process, an overdraft can often be issued on the same day and the money can be withdrawn the next day.
The Extra Perk
A Pradhan Mantri Jan Dhan Yojna account holder can avail of an overdraft of Rs. 5,000 or four times the monthly average balance (whichever is lower). The account must be satisfactorily operated for six months and only one member of a family is eligible for it. The facility is granted to the earning member of the family, preferably women, who must link their account with an Aadhaar card.
Features of Overdraft Facilities
Banks will allow you to borrow up to 3 times your monthly income
The facility is available with less paperwork and an easy-repay option
Flexible repayment options
No foreclosure charges
Interest is to be paid only on the used amount
The salary limit is different for each bank, ranging from Rs 15,000 to Rs 25,000
No security or collateral required
Many banks now offer overdrafts of up to Rs. 4 lakhs
Eligibility for Overdraft Bank Account
The age of the applicant should be 23 to 65 years
The credit limit is based on your history with the bank
To take advantage of our overdraft facilities, you must be a current account holder in the concerned bank
The applicant must have an active income account
The applicant should have a healthy credit history
Required Documents for Overdraft Bank Account
Identity proof – Applicant will have to furnish identity proof of PAN Card/ Aadhaar Card/Voter Id/Driving License/Passport
Address proof – Applicant will have to provide address proof of current residence which can be of Driving license/Passport/Latest Gas Bill/Latest property tax bill/Bank passbook
Age Proof – Applicants’ age proof would be required by the lender such as PAN card/Aadhar card/ Voter ID/Passport or any other statutory copy
Passport size photograph
Salary slips for the last 3 months
Last 3 months’ bank statement
FAQs
The Overdraft interest rate is calculated using the average daily balance method. In this method, you are charged interest based on the balance in your account at the end of each day or period.
If you are unable to repay the Overdraft amount on time, the bank may deduct the outstanding amount plus a penalty from your current or savings account.
There is no negative impact on your credit score if you apply for an Overdraft. However, it will affect your credit score if you exceed the borrowed limit or if you default in repaying the borrowed amount on the fixed tenure.
Banks consider both the applicant’s savings and current account before granting a limit on an overdraft.
No, Overdrafts are considered a current liability because they are due within 12 months of the end of the period in which they arose. They can also be considered a short-term loan.