Overdraft Facility: Things you should know

It is a credit agreement made with a bank that allows an account holder to use or withdraw more money than what they have in their account, but it is limited to the approved limit.

Overdrafts allow you to continue withdrawing from your savings or current account even after your balance is zero.

A customer who overdraws their account is required to pay interest on the overdrawn amount. The interest has to be paid only on the amount borrowed and only for the time it was borrowed.

Overdraft accounts have a fixed rate of interest but it varies from bank to bank and also varies based on the nature of the asset offered as collateral.

Taxability of government bonds.

Overdrafts are like preapproved loans. The interest is calculated daily and is billed monthly. Borrowers who fail or default on paying overdrafts on time are charged interest on the current principal amount at the end of the month and then interest is calculated on the new principal amount.

Prepayment charges in the overdraft are nil, unlike the loans where a prepayment charge is levied.

The available overdraft facility can help individuals or small businesses with short-term cash flow issues, although the negative balance needs to be repaid within a month.

You do not pay the overdraft through Equated Monthly Installments (EMIs) like loans. It is a facility that can be repaid whenever you have the money. You can repay whatever amount you like whenever you like.