Overdraft Loan

What is an Overdraft Loan?

A common type of credit facility that is offered by banks and financial institutions is called an overdraft loan service. This type of loan service allows individuals and businesses to withdraw a greater sum of money than is available in their bank accounts. It is a revolving credit facility, which implies that the borrower can withdraw and repay as per their needs. 

Bank OD loan is a flexible form of borrowing that allows customers to access short-term credit minus the hectic and lengthy application process. Overdraft loans are commonly offered by banks and other financial institutions. The final loan amount is dependent on the borrower’s creditworthiness and the lender’s assessment of their loan repayment ability. 

The loan to be lent depends on the borrower’s creditworthiness and the lender’s examination of their ability to repay. An overdraft interest rate is charged on the total amount borrowed.

Features and Benefits of Overdraft Loan:

An overdraft loan (OD) allows the borrower to withdraw money from a current account even if there are insufficient funds in the account.

Some salient features of an overdraft loan are flexibility, ease of access, and affordability. 

Instant OD, borrowers can withdraw money whenever the need arises, up to a pre-agreed amount. This minimizes the need to apply for a new loan every time. Overdraft interest rate is typically lower than other types of loans. Borrowers simply pay the interest on the amount borrowed, making it an affordable option. 

Overdraft loans boost the credit score of the borrower by helping them avoid costly overdraft fees and ensuring bills are paid on time.

Overdraft Loan Eligibility Criteria

Your eligibility criteria to understand whether or not you qualify for the loan completely depends from lender to lender. But, in most cases, it is necessary for the borrower to have an existing account with the lender and a healthy credit score. In some cases, the lender may also ask for a minimum income level or a certain amount of time as an account holder. 

Other important parameters are the borrower’s creditworthiness and his income level. This is required to ascertain the maximum amount they can borrow and the interest rate they will be charged. 

The borrower’s employment history and stability, along with any outstanding debts or financial obligations will also be taken into consideration. Hence, borrowers should always closely analyze the requirements of different lenders and compare their options to grab the best possible deal.

How to Use Overdraft Facility:

A Bank overdraft loan is a seamless facility to get access to extra funds in case a sudden need arises. In order to use the overdraft facility,  the borrowers need to ensure that their current account has an overdraft limit in place. 

If you are in need of such kind of a loan, you can easily avail of this by contacting the bank or lender and then requesting an overdraft limit be set up on the bank. 

Once you get the approval, you can withdraw funds from the account as much as the limit allows. Always be mindful of the limit and closely track the amount borrowed and the interest rate being charged. 

It is ideal that the borrowers aim to repay the borrowed amount at the earliest possible time to avoid paying piled-up interest amounts. Overdraft facilities are typically created keeping in mind the requirements of short-term borrowing needs. Keep in mind that the overdraft facility should be used responsibly and make timely repayments to steer clear of negative impacts on the credit score.

How is the Overdraft Interest Rate Calculated:

The overdraft interest rate is typically calculated as a percentage of the amount borrowed and accrues on a daily basis. Overdraft loan interest is usually on the higher side as compared to traditional loans. The reason is simply that it is a type of unsecured debt. 

It is important to note that the interest rate is directly correlated to a number of factors such as the borrower’s credit score, income level, and the amount of duration of account maintenance with the lender. 

In order to calculate the interest rate, you need to multiply the outstanding balance by the daily interest charges and the number of days the amount is outstanding. 

Borrowers should carefully review the interest rate and associated fees before taking out an overdraft loan to ensure that it is a suitable option for their financial needs.

How Long It Takes to Get Approval for Loan Overdraft

The amount of time it takes to get approval for your overdraft facility entirely depends on the lender and the borrower’s financial situation. In case the borrower already has a current account with a lender, the process may be quicker, since the borrower’s financial information is already with the lender. It is also interesting to note that the approval for a loan overdraft can be granted within just minutes. 

In case the borrower is a new customer or is in a midst of a complicated financial situation, the approval process may get delayed. The lender will then assess the borrower’s credit score, income level, employment history, etc before proceeding with the approval process, interest rates, and other related factors. It is important to note that the borrower will provide all necessary documentation and information promptly that will ensure a smooth approval process. 

Frequently Asked Questions

It is a type of short-term loan facility that allows the borrower to withdraw funds from their account up to a mutually agreed limit. The major perk of the loan facility is that the borrower can withdraw funds even if they have insufficient funds in their bank account. 

The limit for an overdraft loan is mutually agreed upon by the borrower and the lender. It depends on factors such as the borrower’s credit score, income level, repayment history, and so on. 

But, the catch is- the interest charged for opening an overdraft loan facility might be on the higher side. The reason for this is that it is considered a type of unsecured loan. 

It is upon the borrower to make repayments at their convenience. However, the interest is charged on the entire outstanding amount until it is repaid. Overdraft loans are typically used for short-term borrowings, such as covering unexpected expenses or cash flow issues.

When talking about the interest rate charged on an overdraft loan, it is important to note that it solely depends on the terms that you and your lender have. However, overdraft loan interest rates are typically on the steeper side because it is a form of an unsecured loan and comes with a risk for the lender.

There are certain other factors also involved, like the creditworthiness of the borrower and the amount of the overdraft limit.

If you fail to repay your overdraft loans, you might have to face harsh consequences. First, interest charges and fees may shoot up which will eventually increase the amount you owe. With continued missed payments, your bank may report your account to credit bureaus. This will create a dent in your credit score and make it difficult to borrow money in the future. Your bank also has full authority and power to take legal action against you to recover the funds. This will lead to wage garnishment or the seizure of assets. It is advisable that you inform your bank in case you need help to make payments.

Contact Us