With the availability of an active account with any of the banks, the customer is offered several advantages. One such benefit is the overdraft facility that has been made easily accessible to account holders. As per this facility, the customer is allowed to withdraw money from their bank account even though the balance shows zero. It is important to know that, overdraft facility is usually offered to withdraw a limited amount.
Overdraft limit is basically the money value permitted by the bank which can be withdrawn additional to the credit bank balance. Moreover, the bank also charges extra fees if a customer exceeds his/her overdraft limit, or for bounced payments. OD Limit against property is also offered by financial institutions.
Introduction to Overdraft
If you have an overdraft account, then your bank would be able to manage cheques which had otherwise bounced and ultimately returned without resulting in any sort of payment. In case of a loan, the candidate pays interest over the outstanding balance linked to an overdraft loan. It has been analyzed that, the interest over the loan is fairly lower as compared to credit cards. Moreover, in several cases, additional fees are also added for accessing overdraft protection.
Does an overdraft hamper your credit score? It is decided by your bank to opt for using its own funds to aid a specific overdraft. The other option is to associate an overdraft to particular credit card.
- Case I: When the bank uses its personal funds for backing an overdraft, in this case there won’t be any harm on your credit score.
- Case II: When a credit card gets involved for overdraft protection, then there is a possibility that the customer can increase his/her debt to a stage where it can surely affect the credit score.
Suppose you aren’t able to pay the overdrafts under the scheduled time frame. If this happens, the bank can transfer your account to a collection organization. Therefore, such a collection action might affect your personal credit score and would eventually get reported with the chief credit agencies.
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Advantages of Personal Overdraft over Personal Loan
Considering a personal overdraft, the customer is permitted to withdraw funds as well as repay them at his/her convenience. Moreover, you only need to pay interest on the amount that stays overdue. It means that, you can re-compensate the portion of the outstanding value whenever there is money in your hand, and simultaneously withdraw certain amount whenever there is a requirement.
Furthermore, in India there are banks which manage overdraft limit that can exceed 2-3 times over the individual’s salary or earnings. Apart from such benefits, there are several other advantages which make personal overdraft a better option than personal loan.
1. Quick Fund Release
To access a personal loan, there is a need to fulfill a lot of paperwork. Moreover, you are also bound to present a satisfactory CIBIL score to be eligible to acquire the loan. However, for accessing an Overdraft, you are not required to wait for so long as everything is managed in a quick method.
As soon as you have completed the initial set up concerned for an Overdraft, money can be withdrawn within few hours. On the other hand, if you have opted for a Personal Loan, there would be a similar process every single time when money is transferred and that too under 3-5 business days.
With personal loans, there isn’t much scope for flexibility. The customer is required to pay EMI throughout the loan duration, with the payments being timely delivered. However, this can become a huge mess for many people, particularly for those who need to offer a larger amount of Variable Pay. Hence, a personal loan cannot be seen as an ideal option for such situations.
Under a personal overdraft, you are allowed to take money based on your limit as well as pay back as per your convenience. The customer can repay the amount within days or months, depending on their capability. This makes this option quite flexible or elastic.
3. CIBIL Score Safety
If an individual is frequently availing or repaying loans, there is a greater chance that his/her CIBIL score might change repeatedly. If this happens frequently, then it would be difficult for you to obtain credit cards or loan in the near future.
This condition can be settled by opting for OD Limit. Under this facility, you will be offered only a single loan that you are frequently servicing. Hence, this would offer a positive lift to your score.
You can actively contact your bank branch to assist you with the details concerned with the overdraft facility. Moreover, the customer care service is another option that could inform you about various factors associated to overdraft loan.
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FAQs on Overdraft Limit
Q. How is the overdraft limit calculated?
Ans. The financial health of an individual, enterprise or company determines the overdraft limit. There are various factors involved in calculating the overdraft limit, such as financial stability, account balance, age of account with bank, creditworthiness, relationship with bank, debts or defaults, if any and much more.
Q. What happens if you go over your overdraft limit?
Ans. Generally, a borrower is allowed to use cash, only uptil the sanctioned limit. He/she is not permitted to cross the overdraft limit.
Q. Who offers OD limit loan?
Ans. Almost every bank offers OD loan and some of the leading banks include SBI, HDFC Bank, ICICI bank, Axis Bank, Punjab National Bank, Tata Capital, etc.
Q. Can I withdraw overdraft money?
Ans. Certainly, overdraft itself is termed as a credit instrument, wherein borrowers have access to withdraw cash as per their requirements from the total sanctioned limit.
Q. Can I increase my overdraft limit?
Ans. Increase or decrease of overdraft limit totally depends on the sole discretion of the lender or bank. You can approach the lender and place the request for an increase in overdraft limit.
Q. What happens if I can’t pay my overdraft?
Ans. The bank may charge certain fees or may deduct the outstanding amount directly from your bank account.
Q. How much interest do you pay on an overdraft?
Ans. The interest rate offered on overdraft facility varies from bank to bank and depends on your profile and relationship with the bank in which you have your savings or current account.