Managing cash flow effectively is crucial for both individuals and businesses. One financial tool that offers short-term liquidity support is the overdraft facility in current accounts. This article explains how overdraft facilities work, their benefits, charges, and best practices for users in India.
What is an Overdraft Facility in a Current Account?
An overdraft facility allows current account holders to withdraw more money than their available balance, up to a pre-approved limit. It acts as a short-term credit line, providing immediate access to extra funds when needed.
How Overdraft Facilities Work
- Banks approve an overdraft limit based on factors like account history, creditworthiness, and income.
- Users can withdraw funds exceeding their balance, but within the assigned limit.
- Interest is charged only on the overdrawn amount, not the entire limit.
- Repayment is flexible—borrowers can repay at their convenience, but prolonged usage increases costs.
Types of Overdraft Facilities
- Secured Overdraft: Requires collateral like fixed deposits (FDs), property, or stocks.
- Unsecured Overdraft: Based on income, credit score, and banking history; usually has higher interest rates.
- Overdraft Against Salary: Offered to salaried employees with a consistent income.
- Business Overdraft: Designed for enterprises to manage operational expenses.
Charges & Interest Rates in India
- Interest rates range from 8% to 18% per annum, depending on the bank and type of overdraft.
- Some banks charge processing fees (typically 1-2% of the limit).
- Penalties apply for exceeding the approved limit or delayed repayment.
Pros and Cons of Overdraft Facilities
Pros:
- Instant liquidity for urgent financial needs.
- No fixed repayment schedule unlike loans.
- Interest only on used amount, reducing borrowing costs.
- Boosts credit score if managed well.
Cons:
- High interest rates compared to traditional loans.
- Risk of debt trap if overused.
- Bank charges and penalties can add up.
Best Practices for Using an Overdraft Facility Wisely
- Use it for emergencies or short-term needs, not regular expenses.
- Monitor usage to avoid unnecessary interest accumulation.
- Repay quickly to minimize interest costs.
- Compare bank offers for the best interest rates and terms.
Overdraft Facility vs. Personal Loan: Which is Better?
| Feature | Overdraft Facility | Personal Loan |
|---|---|---|
| Repayment Flexibility | High (repay anytime) | Fixed EMIs |
| Interest Calculation | Only on used amount | On full loan amount |
| Approval Time | Quick | Can take days |
| Interest Rates | Higher | Lower |
| Collateral | May be required | Usually unsecured |
Top Indian Banks Offering Overdraft Facilities
- State Bank of India (SBI): Offers overdrafts against FDs and for businesses.
- HDFC Bank: Provides unsecured overdrafts based on salary accounts.
- ICICI Bank: Business and personal overdraft options with flexible limits.
- Axis Bank: Overdraft against securities and property.
Conclusion
Overdraft facilities in current accounts can be a great financial tool when used wisely. They offer quick access to funds, flexibility in repayment, and convenience. However, high-interest rates and penalties mean users must manage them carefully. Compare different banks, assess your repayment ability, and use overdrafts only when necessary to avoid financial stress.
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