The banking system in India has undergone many changes in the past few years and continues to adapt new innovations. One of the many terms in banking that is quite misunderstood even in the present day is an overdraft facility. An overdraft is easily misunderstood by many and often used in the wrong way. Many people do not realize that there is a way for them to finance money for themselves in more than one ways, one of which involves using an overdraft facility offered by the bank. All an individual is required to pay is an Overdraft interest rate for the amount of money that the customer withdraws. So, let us understand what this facility is all about and also find out what are the interest rates associated with the same.
What is overdraft facility?
An Overdraft facility implies a credit facility which is usually provided to an individual but only against their collateral assets that are placed with the bank. In short, an overdraft is a credit arrangement that allows an individual to use or withdraw more money from his accounts in the bank, even when the balance is below zero. Such a facility is given by a bank in order to help the customer withstand any crises which may arise from an unexpected event like immediate payment to the creditor, an early settlement of their previous loan, purchase of gifts for an impending wedding of a relative, unplanned travel expenditure or medical expenses and more. It can also be in concern to some major event of one’s life such as the unexpected death of a spouse or of a parent, accidents, business failure, fire breakdown or anything as such.
For availing an overdraft facility, in the form of a collateral, the individual has to offer either of these assets to the bank which include house, insurance policies, shares, bank fixed deposits and bonds and more of such type. However, the interest rates charged and overdraft sanctioned to the customer by the bank can vary on the type of the collateral. Some banks charge the interest rate on the exact amount that is withdrawn for use or charge such interest on the reducing balance basis.
Overdraft against House Property: Individual can avail an overdraft by keeping house property as collateral. Banks carry out an appropriate assessment, valuation and survey of the property before approving it as collateral. The sanctioned overdraft amount is usually up to 50% or 60% of the property’s worth which depends on several factors and differs from one bank to another.
Overdraft against Fixed Deposits: Availing an overdraft facility against fixed deposits is relatively easier than house property. One can easily avail 70% of the fixed deposit amount or more which depends on numerous factors. Usually banks charge 1% interest more than the individual is earning on the fixed deposit.
Overdraft against Life Insurance: Individuals looking for availing overdraft facility can also keep their insurance policy as the overdraft collateral. The sanctioned amount will depend on the surrender value of the insurance policy.
Overdraft against Salary: Banks allow overdraft against salary as well. Banks usually allow 50% of the in-hand salary amount as overdraft. To avail overdraft against salary one should have a salary account with the bank.
How can one avail an overdraft facility?
In order to avail an overdraft facility, one can consider the process similar to taking a particular loan from the banks. The type of asset which is used as collateral that the customer produces in front of the banks will depends on the frequency of sanctioning an overdraft facility from the banks. As every collateral has its own upside and downside, this is pertinent to the whole process.
For example, it takes a long time for the sanction of an overdraft in case your collateral is your home. This is because property evaluation is a very time consuming process. On the other hand, getting through an overdraft amount which has been sanctioned against fixed deposits or a life insurance policy will not take much time as the bank will sanction it quickly.
The money is not usually allotted to the customer immediately. It works similar like a customer’s pre-approved loan. Whenever he need funds, he can start withdrawing money from the overdraft account. In addition to this, he has to pay an interest on the money that he has borrowed. It will be charged for the exact time that he has utilized it.
Is it beneficial for a common man to avail overdraft facility?
Considering the numerous purposes for which an overdraft facility can be used, it is worthwhile for a common man to make use of the services that are offered by the bank. It helps a person overcome a troubled situation or a time of grave financial instability in the most hassle free manner. All that the person has to do is to pay a rate of interest on the overdraft that he has availed, other than which, no other liabilities accrue on him.
The current trends in the world of banking allow customers to ask for all of these service through an online portal as well. As far as Overdraft interest rate are concerned, each bank reserves the right to decide its rate of interest that it plans to charge on the overdraft availed by the bank customer. Overdraft interest rate differs for every individual and also varies depending upon the bank. Deciding Overdraft interest rate is the sole discretion of the bank. Therefore, any customer who needs finances on an immediate basis, he can always look ahead for overdraft facility by the bank to avail that finance and meet the impending financial needs that might come his way.