An overdraft facility is a short-term pre-approved loan offered by banks and financial institutions that are granted banking rights by the central bank. Overdrafts allow you to continue withdrawing from your savings or current account even after your balance is zero.
An overdraft facility is a kind of loan, you have to repay the overdrawn amount within a particular duration. A customer who overdraws their account is required to pay interest. Overdraft accounts have a fixed rate of interest but it varies from bank to bank.
Types of overdraft accounts:
Generally, there are two types of overdrafts, secured and unsecured just like loans. Secured overdrafts are being taken against one’s saving or current account. While the unsecured overdrafts do not require any collateral or security pledged with the bank. Below mentioned are the types of collateral or secure overdraft accounts:
Overdraft against a housing property: An overdraft facility is offered against your house as collateral. If you need to borrow funds in order to settle your home loan obligations, you can also apply for an overdraft. An appraiser values and surveys a property before accepting it as collateral. You can get up to 50% overdraft facility against the value of your property.
Overdraft against fixed deposits (FD): This overdraft involves minimal documentation and thereby making the process way faster. The sanctioning process is even faster if you have an FD with one bank and would like to take out an overdraft facility against it with that same bank. You can overdraw up to 75% of the amount invested in the fixed deposit that is being pledged as collateral.
Overdraft against salary: You can avail of an overdraft just on the basis of your salary even if you don’t have FD or property. Depending on the bank, you may be allowed to overdraw up to three times your monthly salary. You must have a salary account with the bank in order to qualify for such an overdraft. So, you should always check with your banker first before you approach any other banks.
Overdraft against insurance policies: You can open overdraft accounts against your insurance policies. The amount sanctioned for overdrafts will vary depending on the surrender value of the policy. Overdrafts against insurance policies are much faster and involve much less paperwork.
Loan against equity-linked securities: You can also get an overdraft facility against your equity investments. However, equity-linked securities are exposed to market risk, so the amount that can be overdrawn from these accounts would below.
Interest Rates: Overdraft loans are charged interest based on the amount of overdraft used on a daily basis and are billed at the end of each month. The interest rate varies from lender to lender and is based on the required loan amount, repayment period, and relationship with the respective bank or financial institution. The interest rate on Overdrafts against Fixed Deposits is 2% above FD interest rates. Penalties are added to the principal amount of an overdraft when the payment is not made on time.
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