Overdraft facility: How to use an Overdraft facility wisely
3 min read
Jan 3, 2024
In today's fast-paced economy, being flexible with money is important. An Overdraft facility helps you manage finances better. This guide covers how it works and its advantages to help you understand how to use this facility wisely for your needs.
What is Overdraft facility?
An Overdraft is a financial tool that allows individuals or businesses to withdraw money from their bank account on credit, even if the account balance is zero. It provides a credit line for relief against temporary cash flow issues. A bank Overdraft is crucial in ensuring that financial operations run smoothly without you worrying about the balance in your account.
Interest is charged only on the amount utilised, not the total credit available. If an overdraft limit is set at ₹50,000 and only ₹25,000 is used, the interest is applicable on the used sum only. This optimises cost-effectiveness.
Features of an Overdraft facility
1. Approved credit limit
Each Overdraft has an approved credit limit, which varies based on your creditworthiness and the bank's policies. This limit defines the maximum amount that can be withdrawn beyond the account balance.
2. Interest rate
Interest is charged only on the amount utilised, not the approved limit. This makes overdrafts more economical, where interest is not charged on the total amount.
3. Nil prepayment charges
Most Overdraft facilities, including those offered by Axis Bank, do not levy charges on prepayment. This allows you the flexibility to repay the borrowed amount at your convenience without incurring extra costs.
Also Read: Complete guide on how to open a Savings Account in 5 easy steps
4. Repayment is not done through EMIs
Unlike loans, repayments for Overdrafts are not structured as EMIs. You have the flexibility to repay the amount as per your cash flow.
5. Minimum monthly payment
A minimum monthly payment is usually required to repay the debt. This includes the interest on the borrowed amount.
6. Joint borrowers are allowed on Overdraft
Overdraft facilities can be extended to joint account holders, providing additional flexibility and accessibility.
Overdraft facility process
How an Overdraft facility works is simple yet effective. Once it is approved, you can withdraw funds up to the specified limit. Interest is calculated daily on the amount overdrawn and is billed periodically. The flexibility to deposit and withdraw funds as needed makes it a convenient financial tool.
Benefits
- Liquidity: Provides immediate funds to meet urgent cash requirements.
- Flexibility: Offers the freedom to withdraw and repay as per convenience.
- Interest savings: Charges interest only on the amount used.
- No fixed EMIs: Eliminates the burden of fixed monthly repayments.
- Easy access: Often linked to the existing bank account for ease of transactions.
At Axis Bank, these benefits are coupled with the ease and efficiency that come with the 24x7 Overdraft facility. If you have a Fixed Deposit, you can use 85% of the amount through the Overdraft facility. Repayments are flexible and can be scheduled to fit your needs. You can easily renew online for uninterrupted financial support.
Overdraft limit
The Overdraft limit is the maximum amount that you can withdraw beyond your account balance. This limit is determined based on several factors, including your income, credit history, and the value of collateral (if any). Financial institutions assess these factors to set a limit that aligns with your repayment capacity.
Types of Overdrafts
1. Against property
You can avail of an Overdraft facility against your property. This allows for a higher credit limit due to the collateral involved.
2. Against insurance policy
Certain insurance policies can be used as collateral for an Overdraft. The credit limit depends on the policy's surrender value.
3. Against stocks and Mutual Funds
Investments in stocks or Mutual Funds can be used to secure an Overdraft, with the credit limit based on the value of these investments.
4. Against salary
Salaried individuals can avail of an Overdraft facility against their salary, where the limit is usually a multiple of the monthly income.
Conclusion
An Overdraft facility is more than just a financial tool — it is a strategic resource that ensures liquidity and fosters peace of mind. With its customer-centric approach, Axis Bank's 24x7 Overdraft facility exemplifies this, offering a robust solution that aligns with the immediate and flexible financial needs of the modern world. By marrying accessibility with convenience, Axis Bank stands as a testament to how tailored financial solutions can empower personal and business aspirations alike.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision
