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What is OverDraft facility? How to use it wisely?

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OverDraft facility

Overdraft facility is issued to the customers facing financial emergency. It helps in raising short-term funds. If overdraft facility is used wisely, then your short-term money requirements can be handled efficiently.

The overdraft facility is provided to the individuals on the basis of property, insurance policies or even securities. You need to pay interest during the period the loan amount is taken. This overdraft facility is imparted by the banks to their customers.

Let us understand the concept of overdraft facility and its wise usage in detail.

Overdraft – Lifeline for individuals to meet short-term needs

Overdraft refers to a credit facility provided to individuals on the basis of the assets. For instance, if you are giving your flat as mortgage to the bank, the bank issues you overdraft facility after verification and approval process.

Suppose, the cost of your flat is Rs.50 lakhs. Then, bank will check your capacity of repaying the loan and the property details. On the basis of banks’ regulations, overdraft facility of Rs. 25 lakhs may be sanctioned to you.

The overdraft facility is provided to the individuals on the basis of property, insurance policies You need to apply for it and mortgage your assets. You must pay the interest for the period you are availing the loan amount. However, you can withdraw overdraft facility as and when required.

It is not compulsory to give only tangible property to the bank. You may even provide shares, bonds, securities, deposits, and insurance policies for the purpose. This overdraft facility is cheaper and convenient as compared to that of credit cards.

Overdraft facility – nice when used wisely

As explained earlier, overdraft facility works like the loan process. You need to submit collateral security such as property, shares, bonds, securities, fixed deposits, insurance policies. But there are certain tips for submitting this collateral.

If you need large amount of money, then you can provide property such as your flat. The bank will undergo property assessment and consume time for it.

If you need money quickly, then you must provide fixed deposits as collateral security. It is observed that banks are much lenient and quicker when the loan is to be issued on the basis of fixed deposits.

Most of the individuals have taken life insurance policies. But these policies will not get you returns. If you want to use them rationally, then you must use them for availing overdraft facility.

Some of the banks also issue overdraft facility to individuals on the basis of their salary structure.

Thus, you must choose your collateral on the basis of your credit limit and requirement. Banks also charge nominal charges for the same. It is one-time expense, particularly at the time of mortgaging property. The timeline for overdraft facility is of one year and the review takes place on annual basis.

Conclusively, overdraft facility is a boon to the individuals in need of funds. But you must first analyze your requirements and the collateral that you are possessing. Take a decision accordingly after weighing your collateral securities. You need to be disciplined in terms of repayment so that your asset is saved.

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8 COMMENTS

  1. Overdraft is a facility that allows the account holder to spend or withdraw more than the available balance in their accounts. This facility helps the individuals and small businesses to overcome their short term cash flow problems. The overdraft balance is usually to be re-payed within a month. Hence, the facility should be used wisely and after much research.

  2. Hi Ankita, I have heard several times about OD facilities. But I am not able to figure out its advantages over loans. So let me put forth the following questions to get more clarity:
    1. Do we have to pay interest compulsorily during the tenure of OD?
    2. If I take Rs. 100 on loan from one bank and Rs. 100 on OD from other bank, what difference in amounts repayment will arise?
    3. Is OD facility provided only by banks or by other financial institutions as well?

  3. Now a days almost all banks provide you the overdraft facility. However your eligibility usually depends on your banking structure. But in my opinion its not very advantageous. Its just a way of diving deep into debts. These facilities sound very fancy however you end up paying lot back to the bank. The only time one should think of using this facility is when its required for business purpose or when a big amount is required.

  4. This facility seems to be of importance in times of quick money withdrawals. For long term, loans are a way out and for short and small spans this can be used but in case of negative cash flow, money needs to be repaid to the bank within a month. I think this facility is basically to balance the mismatch between the expenditure and income of an individual who has agreed on this agreement with the bank.

  5. Overdraft is a facility which allows a person to withdraw money from his account even though his account balance is zero. The bank charges additional fees on every overdraft taken. Overdraft is usually popular among current account holders and businessmen. They are the one who usually require urgent money for their business transactions, however, even salaried people can avail an overdraft in case of emergencies. It is a type of loan given to the customer which has to be repaid along with interest. To use it wisely, one should be aware of his overdraft limits, take an overdraft only when it is really needed, providing the mortgages wisely which will give you highers returns at a cheaper rate, etc. Overdrafts taken against mortgages like fixed deposits and insurance policies usually have cheaper interest rates.

  6. Overdraft facility may be a great solution when it comes to short-term needs. But one needs to understand whether one will be able to take the burden of the mortgage. Hence, judge your situation carefully and find out whether you need to avail the overdraft facility or you can arrange for your monetary needs from other sources.

  7. It’s good for individuals or small businesses when there are cash flow problems at the time of purchasing property. If the period is up within a year, then you have to make sure you pay this back as soon as possible or face high interest rates. You can get yourself further and further into debt without even meaning to.

  8. Overdraft facility is good for short term goal fulfilment. It is a type of loan in which assets both tangible and intangible are kept as security.
    Not much of a difference between this and other type of loans with security.

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