When it comes to the fast-paced economy we live in today, you need to be flexible with money. This is when a financial tool like Overdraft Facility can be beneficial and help you manage your finances better. Let us learn how it works and its features.
What is an Overdraft Facility?
The Overdraft Facility is a financial product offered by public and private sector banks. Using this facility, you can withdraw money from your Current or Savings Bank Account even when the balance in your account is zero. The interest is charged only on the sum you utilise. It is not calculated on the total credit available.
For example, if the overdraft limit offered is Rs. 50,000 and you only use Rs. 25,000, you need to pay interest on the used sum only. Thus, an Overdraft Facility works as a Short-Term Loan, allowing businesses and individuals to withdraw money from their Bank Account on credit. This financial tool can be crucial when ensuring your finances work smoothly without worrying about your account balance.
Features of Overdraft Facility
The various features related to Overdraft Facility include the following:
- Approved credit limits
Each overdraft has an approved credit limit. This usually varies according to the bank's policies and your creditworthiness. Hence, the approved limit can be different for each borrower. This limit is the maximum sum you can withdraw beyond your account balance.
- Interest rates
Interest is charged only on the sum you use, not the total credit available, making overdrafts more economical.
- Offered to Joint Accountholders
The Overdraft Facility can be extended to joint holders. Hence, it offers accessibility and additional flexibility.
- No equated monthly instalments
In the case of Loans, you need to repay using EMIs. However, it is not the same in the case of overdrafts. They are not structured as EMIs. Instead, you can repay the amount depending on your cash flow. However, you should not delay repayment of the overdraft since it affects your credit scores.
- No charges on prepayment
You typically need to pay a prepayment charge whenever you prepay a Loan. However, most Overdraft Facilities do not charge any fees for prepayment. Consequently, you can enjoy the flexibility of repaying the amount you pay at your convenience without incurring any extra cost.
- Minimum monthly payments
There may be a requirement of minimum monthly payment to repay the debt you avail. This also includes the interest charges on the amount you borrow.
Conclusion
Most public and private sector banks in India provide the Overdraft Facility to their customers. It offers a credit line to all for relief against temporary issues related to cash flows and works more than just a financial tool. Instead, it acts as a strategic resource offering liquidity and fostering peace of mind.