An Overdraft (OD) is a type of credit facility offered by banks to allow customers to withdraw more money than they have in their accounts, up to a pre-approved limit. It essentially provides short-term liquidity to individuals or businesses when they need immediate funds.
Key Features of an Overdraft:
- Pre-Approved Limit: Banks set a limit up to which the account holder can overdraw. This limit is usually based on the creditworthiness of the individual or business.
- Interest: Interest is charged only on the amount that is overdrawn, not on the entire overdraft limit. The interest rates for overdraft facilities are typically higher than for regular loans.
- Flexible Repayment: Unlike loans with fixed EMIs, overdraft amounts can be repaid anytime, and interest will only be charged for the days the amount is overdrawn.
- Secured or Unsecured: An overdraft can be secured (e.g., against fixed deposits or property) or unsecured. Secured overdrafts generally come with lower interest rates.
Types of Overdraft:
- Savings Account Overdraft: Linked to a savings account, typically offered to individuals.
- Current Account Overdraft: More common for businesses, linked to current accounts, offering higher overdraft limits.
- Secured Overdraft: The overdraft is secured against collateral like fixed deposits or property.
- Unsecured Overdraft: No collateral is required, but interest rates are higher.
Would you like to discuss any specific aspect of overdrafts or how they work for your business?
