What is Overdraft Facility


What is an overdraft facility?

An overdraft facilitity given to the customer by the bank when they require a short-term loan over their account, even when they have no minimum balance. An overdraft facility is different from personal loans and is used upon different criteria.

In this article, we will provide you with pieces of information about the convenience known as the overdraft facility.

What are the characteristics/Features/Significance of an overdraft facility?

1.    Overdraft facilityis used when you need to withdraw money more than you have deposited in your account up to certain limits. So that you can have money in times of any urgency in a short period.

2. The limit and the interest are approved by the bank by seeing your income stability and status of your account with your credit scores and Collateral provided.

3. The overdraft facility is given for a short period hence, the amount of interest is provided by the bank is based on the amount you have used and for the days you have borrowed it. It is calculated on the money only that you have used, not on the upper limit that has been set.

4. You are liable to pay fines if you have delayed the paying of interest by the date given by the bank.

5. Since this is an overdraft facility you will not have to pay an annual or monthly predetermined amount of money. You can pay in advance or pay the full amount of money at any date within the due date.

6. The banks do not ask for money immediately but you should pay if you have an amount balance because that will affect your credit score.

7. Joint Account holders can also avail overdraft facility but the account holders are liable to pay interest equally.

What are The Different Kind Of Overdraft Facility That You Can Opt For Based On Collateral?

There are several types of OD facilities that you can use, the best option that suits your trade or personal interest.

An overdraft facility through a bank is fixed when you provide your stability proof also called Collateral to the bank, fixing the agreement and the limit according to your earnings. On basis of this, you can set different interest rates and limits of the OD facility.

Overdraft facility against the salary

This is the most common option when you opt for an overdraft facility against your savings account and providing your Collateral with your salary. You just need to connect your banking account, setting the limit by agreement of the bank, connected to the savings account that you are using for your salary payment.

Overdraft facility against residence property 

This is also commonly done when you have no fixed salary but a fixed residence connecting the overdraft facility in your savings account. This facility is taken through this collateral when you have solid residential earnings through rent and lease providing your residence to the others.

The Other benefit of using this facility to the Collateral of residents is that banks allow their customers 50% of their residential property worth as the limit of the overdraft.

Overdraft facility against fixed deposits 

If you have your investment saved in your fixed deposits and that are usually high in value that can cover any kind of accidents or risk banks provide overdraft facility through this Collateral, taking the documents as proof also.

By using this facility, if you fail to pay the overdraft, the interest on FD can be stopped or detected as the overdraft amount that you are liable to pay with a fine.

Overdraft facility against insurance policies 

This is a very risky option as you have to surrender your policies to the bank if the policy is needed before paying the overdraft facility. The bank will have full authority over its insurance policy and coverage.

Overdraft facility against equity Investments 

People who like to play with stocks and get their earnings directly from there, constantly buying and selling equity can also opt for this option because they are instant need money for buying the shares at their highest peaks.

The equities are subjected to market risk and always the overdraft facility given by the bank over its Collateral are lesser in accordance to others.

When You Become Eligible For Availing Overdraft Facility?

Now, let us come to the segment of people who can avail of this facility and use it in the times of their need.

People who have the following account can use this facility according to their income worth.

Savings account-savings account is a type of account in which you can keep your Savings and there is a limit imposed on your account for the amount that you can withdraw.


Salary account– salary account as the name suggests is an account that you have linked with your working organization where your salary is credited. This also keeps the track of your salary deductions and Taxes.

Current account– current account is used for day-to-day transactions by the trading organizations and Businessmen so that there can be a smooth inflow and outflow every day in terms of business.

Deposit account– deposit account holders such as fixed deposit account clients can also avail these facilities providing that fixed deposit documents as Collateral. As the fixed deposit is also counted as property.

What is Procedure for Applying to the Overdraft Facility?

For many people, an overdraft loan facility is pre-approved to a certain limit. You only need to go to the bank providing your Collateral and your overdraft facility will be approved. Savings, deposits, current, and salary account holders are generally pre-approved of these facilities by the bank.

If your account has not been sanctioned pre-approved overdraft facility then you need to reach out to the bank, providing all your documents and Collateral, setting up a meeting with the manager or the person who will approve this facility.

Benefits of Availing Overdraft Facility

1.    Flexible to use– When you have an overdraft facility issued by the bank it is flexible to use when you need money urgently. Also, it has flexible means of repayment as mentioned above.

2.    Fast service– The service of overdraft approval is usually faster than a personal loan that needs to be pre-approved.

3.    Accurate repayment– The repayment of the interest is only counted by the days and the money you have borrowed. Unlike, the personal loan that you have borrowed as a whole with a structured repayment of interest that is compulsory.

Key Aspect You Need To Understand While Differentiating Personal Loan And Overdraft loan?

Many of the facilities are similar in overdraft loans and personal loans but it is important to understand between them before you avail of any of them. Personal loans are of long term and the short term both and it is always given in timed interest where you have to return the money and the interest and specific times be it monthly or annually. You cannot overdraw the money associated with your loan.

The overdraft facility has no such repayment options. You can pay any time you need. When you have to reuse the overdraft facility, you have to repay all the amount of your previous overdraft loan. The overdraft facility has only a Credit line for the short term. 


There is always some risk involved in the matter of money. So you have to handle it responsibly or you will be at a loss and your property and savings can be seized if you are not able to pay your credits timely. 

You can also have legal consequences if you are not able to pay your loan. Hence, be it a personal loan or an overdraft loan you should know your preferences, terms, and conditions according to the bank with all pieces of information beforehand.


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