Overdraft helps account holder to continue their transactions even when no funds in the account. This transaction or withdrawal allows the bank and allows customers to pay their bills to continue. Customers can borrow a set of amounts from a bank and the bank charges the rate of interest on the set of amounts (also called one-time processing fees). The rate of interest may vary from bank to bank. You can say it’s a kind of protection that the bank gives to their customers.
Banks offer overdrafts to their customers on their relationships with a bank. It is a kind of facility that banks provide to their customers like Debit cards, Net and Mobile Banking, and so on. Customers can withdraw money from saving or Current accounts.
When should you use an Overdraft?
It should be used in an emergency or short-term options. In medical emergencyIn pandemicIf you are needy for money in this condition you can use overdrafts because it is cheaper than any other loan. It can be used to avoid fees for bounced or returned paymentsIt is used to meet working capital requirements and business requirementsIt can be used to maintain the reputation in the market when you need to pay an amount but your amount is delayed.
Overdraft is protection that the bank gives you when you have an insufficient balance in your bank account.
How does it work?
Bank lets you borrow more money than your current bank account has in it. But you need to pay charges for it till your limit is completed. Important thing is that if you borrow an overdraft you would pay for it also. You need to find the cheapest way to borrow money. Your account never goes automatically into overdraft bank will notify you first and after that, you can borrow the amount.
Customers can pay overdrafts fully or partially and can borrow again when needed up to the limit.
Features:
Customers can avail of overdraft facilities by any type of bank account (Current or saving). Banks offer overdraft facilities within predetermined limits and it varies from customer to customer. Customers will pay a rate of interest on only the utilized amount. Customers can deposit or withdraw at any time up to the specified limit. Banks also allow joint borrowing in which both borrowers are equally responsible to pay. EMI is not allowed in overdraft accounts, customers need a different amount every time.
Types of Overdraft are:
Authorized Overdraft:
In this type everything is predetermined. Customers would repay on agreements like weekly, monthly, or yearly.
Unauthorized Overdraft:
There are no predetermined conditions or agreements. Bank will change the rate of interest accordingly.
Some Common facilities:
Overdraft against salary account:
If any customer has a salary account, he/she is eligible for an overdraft with a limit of two or three times his salary.
Overdraft against saving account:
Banks also provide the facility of overdraft in saving accounts even if the customer has a minimum number of transactions.
Overdraft against equity:
Banks also give this facility but the permissible limit is less than the market price.
Overdraft against Home:
A homeowner can do overdrawn up to 40-50% of their house.
Advantages:
It helps in managing cash for a business. It fulfills urgent requirements of cash. Customers will pay interest on the only useable amount, not for the used amount. There is no huge amount of paperwork. Security isn’t needed. Customers can withdraw at a short-notice
Disadvantages:
The interest rate on overdraft is not fixed, it changes frequently. It is not an ideal option for long-term financing. The interest rate is high. The only account holder can avail of the facilities.
Protection against it:
You can link your bank account with another account and under the conditions of the low fund, the bank will transfer the fund automatically from the saving account to your account. You can download the bank app for alerts. You can use net banking or mobile banking for all transaction notifications. You can check your balance frequently to ensure that your balance is too low.
It is a current liability because that is needed to pay in an accounting period. It is different from a loan because in an overdraft you need to pay an interest rate on the utilized amount but in terms of a loan, you need to pay interest on the whole amount. If you didn’t pay your overdraft bank has a right to deduct the amount from your saving account. Some financial institutes that allow this are HDFC bank, SBI Bank, Axis Bank, Punjab National Bank, etc.
