Overdraft Facility - Explained

When you create a bank account, you have access to a wide range of financial services. To assist you manage and maintain your accounts, the bank offers a cheque book and a passbook. You'll also get an ATM/debit card, as well as access to the internet and mobile banking. The bank also provides an overdraft facility as a financial service. What is an overdraft facility, though? Here's all you need to know about it.

What is a bank's overdraft facility?

An overdraft is a financial facility or instrument that allows you to withdraw money from your bank account (savings or current) even if your account balance is zero. When you use an overdraft, the bank charges you an interest rate, just like any other credit facility. To get an overdraft limit, you usually have to pay a predetermined interest rate.

What distinguishes the overdraft facility?

Let's look at the aspects of an overdraft limit now that we've established what it is. These are the following:

Banks provide overdrafts up to a certain amount, which varies from borrower to borrower.

A running account with an overdraft limit is one in which you can deposit or withdraw money at any moment up to the set limit.

The bank charges a predetermined rate of interest on the overdraft amount used by the borrower. Interest is calculated on a daily basis and billed/debited to you monthly. If you don't pay the required overdraft amount, the interest rate will go up.

Unlike most loans, where you must pay a prepayment penalty if you pay off your loan early, banks do not impose prepayment penalties on overdraft limits. You can pay off the overdraft in full without incurring any prepayment penalties if you pay it off in instalments.

You can pay off your overdraft in various quantities whenever you have the funds. When it comes to overdraft limitations, the EMI method, which is common with most loans, does not apply.

While there is no set minimum monthly repayment plan for overdraft loans, the 

amount you owe should not exceed your overdraft limit.

Overdraft limitations are available to joint borrowers. Both applicants, however, are equally accountable for repaying the sanctioned amount. Overdraft protection

Banks accept several sorts of collateral for overdraft loans.

Overdrafts on your home or other property

Overdrafts on your fixed deposit accounts

Taking out a loan against your life insurance policy

Overdrafts on your equities investments

Overdrafts are loans taken out against your salary.

Last but not least, As you can see, the overdraft facility is one that may really assist you out when you're short on cash. Banks often provide reasonable repayment terms so that you may return your overdraft loan whenever you choose. However, before requesting this service from your bank, you must first learn about the benefits and drawbacks of the overdraft facility, and then proceed with the limit.