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 Some banks charge the interest rate on the exact amount that is withdrawn for use or charge such interest on the reducing balance basis.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.
