Overdraft Facility: An Overdraft Facility is a credit service provided by banks and financial institutions that allows you to withdraw funds from your current or savings account even if your balance is below zero. It extends your bank's authorized limit, meaning the amount you withdraw beyond your balance is considered "overdrawn."
The available funds you can access through the Overdraft Facility depend on your relationship with the bank. You can withdraw money up to the sanctioned limit. In exchange for this credit, banks charge interest, but only on the amount you actually use from the approved limit. An Overdraft Facility acts as a short-term loan that needs to be repaid within a set period, along with interest as agreed upon in advance.
Features Of An Overdraft Facility
Approved Credit Limit: An Overdraft is granted based on a pre-set limit, which can vary for each customer depending on their relationship with the bank.
Interest Rate: The interest on an overdraft is calculated daily and is billed to the account at the end of the month. If you fail to repay the overdraft as agreed, the interest is added to the principal amount, and future interest is calculated on the new total.
Zero Repayment Charges: Unlike loans that often have prepayment charges, the Overdraft Facility does not impose any repayment charges. You can repay the overdraft in a lump sum without needing to rely on EMIs.
No EMI-Based Repayment: The repayment of an overdraft does not require fixed EMIs. You can repay the borrowed amount whenever you have funds available, and you can choose how much to repay at a time. However, if the lender requests repayment, you must meet their terms.
Minimum Monthly Payment: There is no set minimum monthly payment for an overdraft. However, the borrowed amount must stay within your approved limit. It's important to repay your overdraft promptly, as delays can harm your credit score.
Joint Borrowers: You can apply for an Overdraft Facility jointly with a co-applicant. Both borrowers are equally responsible for the full debt and its timely repayment. If one defaults, the other will be liable for the entire amount, and both parties' collaterals are at risk in case of default, regardless of each person’s share of the overdraft.
What Is An Overdraft Fee?
An overdraft fee is charged when a bank provides a short-term loan to a customer, allowing them to cover bills and other expenses even when their account balance reaches zero. For a fee, the bank extends this credit to help manage unexpected charges or insufficient funds. Typically, this includes a one-time fee for using the overdraft facility, along with interest on the remaining balance.