What is an Overdraft Facility?

A personal overdraft is a facility that allows you to withdraw funds as per your needs. The facility can be availed up to an approved limit against your existing savings account in a bank or against any pre-approved loan amount. You can do multiple withdrawals and repay the withdrawn amount at your convenience. The most attractive feature of an overdraft facility is that the interest amount is only charged on the utilized amount out of the total approved limit. Any lender or banking intuition determines the overdraft limit based on a customer's relationship with the bank. A personal overdraft facility is offered by both private and public lenders to meet your diversified personal requirements. It’s a type of short term loan

Key Features of Personal Overdraft

A personal overdraft facility comes with a number of attractive features that include the following –

  • Withdraw multiple times from a pre-sanctioned loan amount or against your bank account/ salary account.
  • The overdraft amount is decided based on the customer’s existing and past relationship with the lender.
  • Flexible repayment process. You can pay as per your convenience.
  • The overdraft repayment tenure is decided by your lender. Lenders may also extend the repayment tenure provided the customer has a healthy relationship with the lender.
  • Interest is charged only on the withdrawn/utilized amount.
  • Overdraft facility can be availed by both salaried and self-employed individuals
  • It's a type of short term credit that helps you meet your short term requirements.
  • No extra collateral required to avail an overdraft loan or facility.
  • No prepayment charges are applicable.

Benefits of Availing Overdraft Facility –

Apart from meeting your short term requirements with an overdraft loan, you can also enjoy the following benefits –

  • Get Access to Quick and Instant Cash –
    It helps you get instant cash to meet your personal needs. With an overdraft loan, you can meet your urgent cash crunch requirements. The overdraft facility helps you get a short-term loan against your fixed deposit, savings account or salary account or any pre-approved loan.
  • Competitive Interest Rates -
    Any bank or private lender may offer competitive rates of interest on your overdraft amount provided you have a good credit score and healthy past transaction history.
  • Flexibility –
    Enjoy the flexibility of withdrawing what you actually need and pay interest only on the withdrawn amount. For example, if the approved overdraft limit is Rs. 20000 and you have only withdrawn and utilized Rs. 10000 throughout the entire tenure, you will be charged interest only on the withdrawn amount that is Rs.10000. Also, you can choose to repay as per your convenience within the stipulated period.
  • Minimal Documentation -
    there is hardly any paperwork involved. You may go through a very simple and minimal documentation process as you already have an existing relationship with your lender.
  • Helps Manage Your Cash Flow –
    In case you are facing a temporary cash crunch, an overdraft facility can help you manage your cash flow in any unplanned scenarios
  • No EMIs Required –
    Here, you don't have to repay the amount in EMIs. So, there is no chance of missing out on your EMIs or possibilities of cheque bounce due to insufficient funds in your account. You can repay the interest as and when you are comfortable.

Documentation Required for Availing An Overdraft Facility

Generally, your lender may ask you to submit the following documents and complete your KYC check while applying for an overdraft facility -

  • A duly filled application form signed by you, if you are applying manually.
  • 1/2 Passport-sized photographs.
  • Identity Proof - Passport/Voter ID card/ / PAN card/ Aadhaar card/ Driving license ( Any one of them)
  • Address Proof - Utility Bills (Water/Electricity Bills), Passport/ Driving license/ Voter ID card
  • Date of Birth Proof - PAN card/ Aadhaar card with DOB/ Birth Certificate/ SSC Mark sheet/ Passport

***Please note that the documentation process may vary from lender to lender.

Eligibility Criteria for a Personal Overdraft:

The eligibility criteria for overdraft facility is mentioned below:

  • Should be an Indian resident.
  • Must be a salaried or and self-employed individual.
  • Both salaried and self-employed individuals are eligible.
  • Minimum age should be 21 years.
  • Maximum age should be 65 years.
  • Applicants should have an existing relationship with the lender.
  • Good CIBIL or credit score shall be an added advantage

Apart from salaried and self-employed individuals, Private Sector Firms, Proprietorship firms, Limited Liability Partnerships, and Public or Private limited Entities can also avail overdrafts. Please note that the eligibility requirement for a personal overdraft may slightly vary from lender to lender. You are advised to check with your lender directly before applying for an overdraft.

Types of Overdraft loans: Benefits of Availing Overdraft Facility –

Overdraft loans are usually divided into types –

  • Secured Overdrafts –
    The overdrafts taken against one’s saving or current account, Fixed Deposit, Salary account or property. This can be further divided into the following categories-
    • Overdrafts against house/ property
    • Overdrafts against equity holdings
    • Overdrafts against salary
    • Overdrafts against life insurance policy
    • Overdrafts against fixed deposits
  • Unsecured Overdrafts -
    In an unsecured overfat, you don’t have to provide collateral or security against the amount approved.

How to Avail An Overdraft facility:

It’s quite simple. You can avail of an overdraft by using various online channels and also manually. The quick and fastest way of applying for a personal overdraft is to use the online mode.

  • Apply for Overdraft Online –
    Log in to your internet banking through your lender’s website or mobile app and click on apply for an overdraft. Your overdraft shall be active soon.
  • Apply for Overdraft Offline –
    You can choose to visit your lender and submit a duly filled application form supported by all required documents.

Interest Fees and Other Charges

The interest fees and other charges applicable on an overdraft may vary from lender to lender. Besides, there shall be further variation between interest rates offered by banks and NBFCs.

Overdraft Facility vs Loans

Any personal overdraft is an arrangement between you and your lender where your lender allows you to withdraw a particular amount depending on its relationship with you. It’s a type of credit that has been granted to you to meet your unplanned or urgent short-term requirements. On the other hand, a loan is a type of debt that you take for a particular tenure to meet your long-term or short-term requirements. Mentioned below are a list of difference between an overdraft and loans:

Overdraft Facility Loans
It’s a line of credit It’s a type of borrowed capital
Pay interest only on the used amount Pay interest for the entire borrowed amount
Interest is calculated on daily basis Interest is calculated on a monthly basis. It can be either fixed or adjustable.
Flexible repayment tenure. No EMIs required. Flexible but you need to repay using EMIs.
Processing fee may not be mandatory. Not all lenders charge processing fees. A one-time processing fee is applicable.
It’s a short term credit/fund issued for a short duration Any loan can be taken for either short term or long term.
Prepayment penalty may not be applicable. It depends on the lender. Prepayment penalty is applicable

Frequently Asked Questions (FAQs)

  1. What does KYC mean and what is E-KYC? What are the primary documents required to complete the KYC process?
    KYC stands for Know your Customer. This is a process used by banks and NBFCs to verify customers’ identities. You can complete your KYC process by using Aadhaar-based and In-Person-Verification (IPV).
    • E-KYC refers to the online process of doing KYC which can do with your Aadhaar OTP received in your registered mobile no.
    • Your address proof and identity proof with your photo attached are two primary documents required to complete the KYC process for any financial transactions.
  2. Can overdraft be availed jointly?
    Yes, an overdraft loan can be availed jointly where the co-application/borrower shall be equally responsible to repay the withdrawn amount.
  3. Can I apply for an overdraft against my existing fixed deposit account in the bank?
    Yes. You can apply for an overdraft against your existing fixed deposit account and get it approved with minimal documentation. Here, the approved limit is usually less than the total value of your fixed deposit amount. You can get 90% of the total value of your term/fixed deposit.
  4. What is a pre-approved overdraft?
    Here, a line of credit shall be pre-approved by your bank or lender so that you can withdraw funds up to the maximum approved limit as and when you need. And the withdrawn amount will be considered as an overdraft which you need to repay as per your convenience than the total value of your fixed deposit amount. You can get 90% of the total value of your term/fixed deposit.
  5. What are some of the most attractive advantages of an overdraft?
    The biggest advantage that an overdraft has that it allows you to withdraw funds from your existing savings bank account even if you have a very low account balance or it reaches zero. Another great advantage is that you pay interest only for the withdrawn amount, not for the entire approved amount.
  6. Why should I choose an overdraft over a loan?
    If your requirement is for the short term and you need some urgent cash to meet your temporary cash crunch, then you can opt for an overdraft. As this is faster and quicker than applying for a loan.
  7. How is an overdraft different from a loan?
    An overdraft is also a type of short-term loan. However, the major difference between an overdraft and a loan is that in overdraft, you can withdraw more than your existing account balance, if you are applying for an overdraft against your savings or current account. Plus, you only pay interest on the withdrawn amount unlike in a loan where you pay interest for the complete borrowed amount.