OD/CC Limit

Overdraft Limit Facility

Table of Contents:

• Applying for an Overdraft Limit facility
• Features of Overdraft Limit Facility
• How does an Overdraft Limit facility work?
• kinds of Overdrafts Limit
• FAQs

Overdraft Limit Facility could be a financial instrument within which you’ll withdraw money from your savings or accounting, whether or not your account balance is zero. This feature is provided by almost every financial organization, including banks and NBFCs. It’s a kind of short-term loan to be repaid in defined tenure as needed by the financial institutions. Lenders shall levy charge per unit that the borrower must repay, as per the bank’s terms and conditions. the sort of charge per unit offered by the lender is fixed and not floating.

Applying for an Overdraft Limit Facility

As aforementioned, borrowing through the overdraft limit is simply like borrowing a loan from the bank or NBFC. Some customers are pre-entitled to avail the overdraft facility by the lender while some should take approval. When the pre-entitled customers withdraw more money from their account, their account balance becomes negative and therefore the overdraft facility is activated automatically. the shoppers who require the lender’s approval to avail the overdraft facility should submit their request to their lender either in writing or through the official website. Overdraft taken against a checking account is taken into account unsecured overdraft while the overdraft where the collateral is pledged is taken into account secured overdraft.

Features of Overdraft Limit Facility 

• Approved Credit Limit: Overdraft is awarded over a predetermined limit. This limit is different for every borrower.
• Interest Rate: The charge per unit is charged on the number of overdrafts used. it’s calculated on a usual and it’s billed to the account at month-end. If you default paying the overdraft as per set schedule, the interest amount is added to the principal amount at month-end and so interest is calculated on the new principal.
• Nil prepayment charges: Whenever you would like to repay a loan, usually a prepayment charge is levied. However, this can be not the case with the overdraft facility. once you repay the number borrowed through overdraft you are doing not pay prepayment charges. Also, you would like not to repay the Overdraft amount in EMIs. you’ll repay the borrowed amount cumulatively.
• Repayment isn’t done through EMIs: Repay the overdraft whenever you’ve got the money. you are doing not need to repay the overdraft amount such as you repay a loan. you probably did not repay in Equated Monthly Instalments (EMIs). you’ll repay whatever amount you wish whenever you prefer. However, if the lender demands a repayment, then you will need to fulfil that demand.
• Minimum Monthly Payment: Overdraft has no minimum monthly repayment however the number you owe should be within the overdraft limit. you ought to not delay overdraft repayment for long, because it affects your credit score.
• Joint borrowers are allowed on Overdraft Limit: If you are taking an overdraft jointly then you and your joint applicant are both, in effect, accountable for the complete debt. no matter the proportion of overdraft borrowed, both the applicants are liable for the timely repayment of the overdraft. this suggests that if one of the borrowers is unable to pay/defaults, then the other borrower needs to pay the whole amount. In such a case, no matter overdraft proportion of joint borrowers, all collaterals of every of the borrower are at stake if a default occurs.
• Workings: Please note that your account might not automatically move into overdraft once you write a cheque. There are chances that your cheque is dishonoured rather than going into overdraft so a dishonour charge is also levied on your account.

How does an Overdraft Limit facility work?

If you get an overdraft account sanctioned from the bank then you’ll receive the requested overdraft Limit amount rather like you receive a loan amount from the bank. If you’re pre-approved for the overdraft facility, whenever you would like funds, you’ll withdraw from your checking account and it’ll move into overdraft. you’ll overdraw funds through your account up till an agreed limit. By utilizing the overdraft limit facility, you basically increase the outstanding on your bank account; once you deposit funds, the outstanding decreases. From the time you borrowed until you repaid, you’ll be charged interest by your bank.

In an overdraft limit, you’ll repay money to the lender, fully or partially both, whenever you would like to. After repaying whenever you’ve got money, you’ll again withdraw money from your account as per your need until the limit of the overdraft is reached.

When a borrower uses the overdraft limit facility through his/her checking account, the bank doesn’t have collateral against it. However, if the borrower takes an overdraft against his/her assets as collateral then it’s a secured overdraft. These assets are the funds in your account and even your house, insurance policies, fixed deposits (FDs), shares, bonds etc. Also, note that the interest rates charged and overdraft limit amount sanctioned by banks vary looking on the collateral.

Interest on the overdraft limit amount is calculated daily because overdraft amount isn’t repaid as per a group schedule. The borrowed amount is repaid without prior intimation by the borrower. Just depositing funds in your checking account reduces your outstanding balance and thus reduces your overdraft limit amount. So, interest applicable to the borrowed amount must be calculated daily since the borrowed amount ledger can change daily. 

As explained the overdraft facility is simply a revolving short term credit facility. Avail it if you would like funds to beat financial needs and repay them ASAP in order that your interest pay-out doesn’t bring together.

Types of Overdraft Limits

 An overdraft limit facility is granted to a borrower on a secured or unsecured basis. Secured overdraft limit is one where you pledge collateral (asset). If you’re unable to repay your overdraft limit then the lender can dump your assets to recover whatever they’ll. You shall be vulnerable to pay the difference if the collateral asset doesn’t cover the price of the withdrawn amount within the overdraft limit.

Below mentioned are various types of Overdrafts:

 Overdrafts Limit against House

Overdraft Limit facility is obtainable against your house as collateral. Overdraft is additionally offered to home loan customers who are trying to find funds to settle their existing home loan repayments. Before approving the house as collateral, the assessment, the valuation and also the survey of the property are done. Overdraft funds are given against property as collateral don’t seem to be disbursed immediately because of the same. The sanctioned overdraft amount is sometimes up to 40%-50% of the property’s worth. Your credit history and repayment capacity are considered while granting overdraft limit against the house as collateral.

Overdrafts Limit against Fixed Deposits 

Getting the overdraft limit sanctioned against Fixed Deposits (FDs) and insurance policies as collateral is simple as compared to getting an overdraft limit sanctioned by keeping your home as collateral.

one in each of the reasons is that property evaluation takes time. In any case, overdraft against FD is preferable for the lender too, because the customer’s FD account is with the lender and also the lender knows the customer much better. If you avail an overdraft against your fixed deposit, then you’re eligible for a higher percentage of sanctioned amounts, approx. 75%. The rate of interest charged is also less if you retain FD as collateral. Usually, banks charge 2% more interest than the interest you’re earning from the said fixed deposit if you retain the FD as collateral.

Overdrafts Limit against the policy

If you retain your policy as your overdraft limit collateral then the sanctioned amount depends upon the surrender value of your policy. The Loan to Value of policy is greater than LTV of Fixed Deposits, i.e. you get more cash sanctioned from the bank if you retain your policy as collateral rather when you keep your FD of the same amount as collateral.

Overdrafts Limit against Equity

Equity isn’t preferred as an option for collateral however it’s possible to achieve overdraft limit facility through it. the rationale being that equity depends on the market and thus its value fluctuates. this can be why the proportion sanctioned for overdraft limit against equity as collateral is a smaller amount.

Overdraft Limit against Salary

Banks offer overdraft limit against your salary too. you’ll be able to get an overdraft limit up to 2-3 times of your salary but that will vary from bank to bank. To avail such an overdraft you need to possess a salary account with the said bank. Such a facility is also called a short-term loan facility. 

FAQs

Q. Which bank provides an overdraft limit facility? 

Ans: Almost every public or private sector banks in India provide overdraft limit facility to its customers. However, the minimum and maximum loan amount, rate of interest and repayment tenure set by banks may differ and shall depend upon the applicant’s profile, financial history and repayment capacity.

Q. What is the salary amount required for overdraft limit facility?

Ans: Salary amount required for Overdraft Limit is an overdraft feature that’s extended against the salary account of the account holders. This facility enables the salaried account holders to withdraw amount or issue cheques whether or not their account balance is zero. Salary Overdraft Limit facility may be a style of short term loan offered only to salaried people or employees who hold salary accounts.

Q. Who can avail overdraft limit facility?

Ans: Overdraft Limit facility is availed by the borrower on a secured or unsecured basis. The borrower is individuals, self-employed professionals, enterprises, etc. just in case of overdraft facility. If it’s a salaried overdraft, then it can’t be used for business purposes and might be availed only by salaried employees