What is Personal Loan Overdraft Facility - Overview and How It Works?

Entrepreneurs often face situations when they need additional funds to run their business operations smoothly. Such hindrances may halt the business for a while, harming its finances, reputation, and overall conduct. If you are an SME owner finding yourself with a lack of funds, you may easily rely on an overdraft facility. It is an intelligent way to meet immediate capital needs without impacting your business finances. 

In the following sections, you will get acquainted with the overdraft facility meaning, working, features, benefits, types, and how it is different from a Personal Loan.

What is an Overdraft Facility?

An overdraft (OD) facility is a popular financing option that gives you a funding limit up to which you can withdraw funds as and when required and re-deposit at your convenience. Thus, it lets you withdraw and repay according to your convenience, making OD a desired credit option with competitive interest costs. You can enjoy similar financing benefits with the flexibility of a Personal Loan from Hero FinCorp.

How Does an Overdraft Facility Work?

With a personal overdraft facility, you can withdraw more money than your account balance up to a sanctioned limit. It is like a short-term Personal Loan offering quick access to the required funds with flexible repayment options. However, instead of getting a lump sum, you can withdraw money as and when needed and re-deposit as per your convenience. You pay interest only on the withdrawn amount until you re-deposit it. 

Features and Benefits of Overdraft Facility

Here is a look at the features and benefits of an overdraft facility:

• Pre-Approved Credit Limit: with a personal overdraft facility, you get a predetermined credit limit up to which you can withdraw money. Depending on their credit history and provider's policy, it may vary from one customer to another.
• Interest: The facility provider calculates the interest rate on a daily basis and bills it to the account at month-end. In case of a default, they add the interest to the principal at the end of the month. Following that, they calculate the interest on this new principal.
• No Repayment Fees: If you decide to repay a Personal Loan before its tenure completion, you have to pay a prepayment charge as per the lender’s policy. However, that’s not the case with an OD. You can repay the amount in a lump sum without any charges.
• No EMIs: An overdraft facility allows you to repay the withdrawn amount whenever you have the finance. Instead of following an EMI plan, you can pay it off the way you like. However, the facility provider may demand repayment, and you must fulfill their requirement.
• Zero Minimum Monthly Payment: An overdraft does not have any minimum monthly payment. You can withdraw any amount within your sanctioned limit and not repay until you have the required funds. However, the interest rate will keep accruing.
• Joint Borrowers: You can apply for an OD jointly with a co-applicant, and both of you will be responsible for timely repayment. If you default, your co-borrower must shoulder the amount. 

What is the Overdraft Limit for Salaried Individuals?

Several factors determine the overdraft limit for salaried individuals, including their monthly income, relationship with the bank, and credit history. Usually, the OD limit is a percentage of the borrower’s monthly salary, up to 1-3 times their income. Borrowers can withdraw funds from the OD account and get a financial cushion for urgent needs. 

Also Read: 5 Financial Planning Tips for Salaried Employees

Types of Overdraft Facility

Now that you know what an overdraft facility is, here is a look at its types:

• Authorized Overdraft: The financial institution pre-approves it, and the account holder can withdraw money exceeding their balance to a predetermined limit.
• Unauthorized Overdraft: If you withdraw more money than your account balance without pre-approval, it will attract high penalties and fees.
• OD Against Property: You may obtain a credit line by pledging your property as collateral and paying interest only on the withdrawn amount. 
• OD Against Fixed Deposit: Use your fixed deposit as collateral against the line of credit. The sanctioned limit depends on the FD value.
• OD Against Insurance: An insurance policy’s surrender value may also serve as collateral against an overdraft limit. 
• OD Against Equity: You may secure an overdraft against the leverage value of your equity holdings. The stock’s market value determines the OD limit, letting you utilise your stocks without liquidating them.
• OD Against Salary: This line of credit is linked to your salary account based on your employment status and monthly income.

Difference Between Term Loan vs Overdraft Facility

Let’s look into the differences between term loan and overdraft facilities:

Also Read: What Is a Term Loan – Types, Example & Steps to Apply Online

Conclusion

An overdraft facility is an excellent funding option during urgent financial needs. The facility for withdrawals and repayments is flexible, and interest is applicable only on the withdrawn amount. However, you must conduct proper research on them before applying. You can enjoy similar benefits with a Personal Loan from Hero FinCorp. Here, the interest rates are fixed, loan amounts are offered as per need and creditworthiness, and repayment terms are flexible in budget-friendly EMIs. A Personal Loan EMI Calculator lets you devise a repayment plan according to your convenience.

Frequently Asked Questions

1. How do I qualify for an overdraft facility?

You may qualify for an OD if you have a current account and fulfil other eligibility conditions.

2. How is the overdraft limit determined?

The overdraft limit depends on your account balance and credit history. The facility provider determines your limit based on your income, account balance, credit history, etc. Most lending companies are also concerned about your age, income, and employment or business history.

3. Can I increase my overdraft limit?

Yes, you can request an increase in your overdraft limit online or offline based on your credit history and other parameters.

4. Can I repay the overdraft amount early?

You can repay your overdraft amount early as per your convenience without any prepayment charges.

5. Can I get an overdraft facility for my business account?

Many banks and financial institutions provide overdraft facilities for business accounts.