How to apply for overdraft facility

Overdraft is a financial facility provided by banks to their customers. Through this, you can withdraw money from your bank account even when there is no money in it. The bank sets an overdraft limit for the customer, which depends on his relationship with the bank. The customer can withdraw money only up to the prescribed limit. The bank charges interest only on the money that is withdrawn from the overdraft account.

How to apply for overdraft facility

Taking overdraft is similar to taking a loan from the bank. Those who want to apply for overdraft facility can apply online or by visiting the bank. Overdraft for a bank account is considered an unsecured overdraft, whereas the overdraft for which something is mortgaged is considered a secured overdraft. Many banks charge a processing fee of up to 1% to provide this facility to their customers.

What are the features of Overdraft

1.Limit: A limit is set for the Overdraft account. This limit may vary for each customer.

2.Payment is not made through EMI: Pay the Overdraft whenever you have the money. You do not have to repay the Overdraft amount the way you repay a loan. You do not have to pay in Equated Monthly Installments (EMIs). You can pay as much as you want whenever you want. However, if the lender (bank or NBFC) demands payment, you will have to pay only then.

3.Minimum Monthly Payment: There is no minimum monthly payment in Overdraft. But you should not delay the Overdraft payment as it affects your credit score.

4. Interest Rate: The interest is charged on the overdraft amount used and not on the total overdraft limit. It is calculated on a daily basis and at the end of the month, the total bill is generated. If you are paying it every month and miss a month, the interest amount will be added to the principal amount withdrawn at the end of the month and thereafter interest will be added on that amount.

5. Zero Prepayment Charges: Prepayment charges are usually levied whenever you want to avail a loan. However, this is not the case with overdraft facility. You do not pay prepayment charges when you pay back the amount borrowed through overdraft. Also, you do not need to pay the overdraft amount as EMI. You can pay the borrowed amount in one go.

6. Joint accounts are allowed in overdrafts: If you take a joint overdraft, both you and your co-applicant are responsible for the loan repayment. Either of you can withdraw money from the overdraft account but both applicants are responsible for the timely repayment of the overdraft. This means that if one borrower is unable to pay/defaults, the other borrower will have to pay the entire amount. In such a case, the guarantee given by both to the bank is at stake if ever there is a payment default.

How an overdraft account works

If you have a bank overdraft account, you can withdraw money from that account up to the prescribed limit whenever required. The amount withdrawn will attract interest. You can redeposit the withdrawn money in the account whenever you want, after which the interest will also stop. You will be charged interest by the bank from the time of borrowing till the time you repay the outstanding amount.

Interest calculation on overdraft amount is done on daily basis as there is no fixed time for payment of money. Depositing money in your bank account reduces your outstanding amount. In overdraft, you can pay the withdrawn amount in one go or in parts. After payment, if you need money again, you can withdraw money again.

Availability of bank overdraft facility is similar to getting a loan from banks. Overdraft facility is provided without security/guarantee. However, you can also avail overdraft by pledging some security/property in the bank, that is secured-overdraft. If you are unable to pay your overdraft, the lender (bank or NBFC) can sell your assets to recover the loan as much as possible. If the amount recovered through assets is less than the amount withdrawn from the overdraft account, you will be liable to pay the outstanding amount.

Types of Overdraft

1. Overdraft against Home

Overdraft facility is provided against your home. Overdraft is also provided to home loan customers who are looking for finance to repay their existing home loan. Before approving the home as security, the property is appraised and surveyed. The approved overdraft amount is usually up to 50% or 60% of the property value. Your credit score and repayment capacity are also considered while evaluating an overdraft application against home as security.

2. Overdraft against Fixed Deposit

Compared to getting an overdraft against your home, it is easier to get an overdraft against a life insurance policy and a fixed deposit. One reason for this is that property appraisal takes time while the value of the FD is determined. Therefore, overdraft against FD is also easier for the lending bank. You can get an overdraft equal to 75% of the FD value. The interest rate is also lower if you keep the FD as security. If you keep the FD as security, usually banks charge 2% more interest than the interest earned from the FD for granting overdraft.

3. Overdraft against Insurance Policy

If you keep your insurance policy as security for your overdraft, the amount sanctioned depends on the value of your insurance policy. The LTV ratio of loan against insurance policy is higher than that of fixed deposit (FD), i.e. instead of keeping your FD, if you keep your insurance policy of the same value as security, you can get a higher loan from the bank.

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4. Overdraft against equity/shares

Banks do not want to take equity/shares as security against overdraft. However, it is possible to avail overdraft facility through it. This is because equity is market dependent and thus its value remains volatile. So even if the bank offers overdraft against equity, its value will be less.

5. Overdraft against salary account

Banks also offer overdraft against your salary account. You can, usually, get an overdraft of 2 to 3 times your salary. To avail this type of overdraft, you must have a salary account in the bank from which you want to avail overdraft. This type of facility is also called a short-term loan.

The overdraft facility offered by banks or loan institutions can be availed by savings or current account holders, salaried persons, chartered accountants, business owners, doctors, bank employees, etc.