WHAT IS OVERDRAFT LOAN?
Updated on : 2020-Dec-31 16:59:41 | Author :
WHAT OVERDRAFT MEANS:
DOCUMENTS REQUIRED FOR OVERDRAFT LOAN :
Overdraft Facility is a financial tool in which you can withdraw money from your savings or current account, even if your account balance is zero. This facility is provided by almost every financial institution, including banks and NBFCs.
Overdraft facility is a type of short-term loan to be repaid in defined possession as required by the financial institutions. Lenders shall impose interest rate that the borrower needs to repay, as per the bank’s terms and conditions. The interest rate offered by the lender is fixed and not.
Application for an Overdraft Facility
Borrowing through overdraft is just like borrowing a loan from the bank or NBFC (Non-Banking Financial Company ). Some customers are pre-entitled to get the overdraft facility by the lender while some have to take approval. When the customers withdraw the extra amount from their account, their account balance becomes negative and the overdraft facility is activated automatically. The customers who require the lender’s approval to get the overdraft facility have to submit their request to their lender either in writing or through the official website. Overdraft taken against a bank account is an unsecured overdraft, on the other hand, the overdraft where the collateral is pledged is considered secured overdraft.
Features of Overdraft Facility
Credit Limit: Overdraft is given over a predetermined limit. This limit can vary for different borrowers.
Rate of interest: The interest rate is charged on the number of bill of exchange used. It is calculated on daily and it's beaked to the account at month-end. If you fail paying the bill of exchange as per set schedule, the interest quantity is going to be superimposed to the principal quantity at month-end so interest is going to be calculated.
Null defrayal charges: Whenever you wish to pay a loan, sometimes a defrayal charge is obligatory. However, this is often not the case with the bill of exchange facility. When you repay the number borrowed through bill of exchange you are doing not pay defrayal charges. Also, you need not repay the Overdraft amount in EMIs. You can repay the borrowed amount cumulatively.
No Repayment is done through EMIs: Repay the overdraft when you have the amount. You do not have to repay the overdraft amount as like you repay a loan. You do not have to repay in Equated Monthly Instalments (EMIs). You can repay whatever amount you like whenever you like. However, if the lender demands a repayment, then you will have to fulfil that demand timely.
Minimum Monthly Payment: Overdraft has no minimum monthly repayment however the amount you owe should be in the overdraft limit. You should not delay overdraft repayment for long, as it affects your credit score.
Types of Overdrafts
An order of payment facility may be given to a receiver on a secured or unsecured basis. Secured order of payment is one wherever you promise collateral (asset). If you're powerless to repay your order of payment then the investor will dump your assets to recover no matter they will. You shall be susceptible to pay the distinction if the collateral quality doesn’t cowl the value of the withdrawn quantity within the order of payment.
Various forms of Overdrafts are:
Overdrafts against House
Overdraft facility is obtainable against your house as collateral. Order of payment is additionally offered to equity credit line customers WHO are searching for funds to settle their existing equity credit line repayments. Before approving the house as collateral, the assessment, the valuation and therefore the survey of the property is finished. order of payment funds given against property as collateral isn't interacted at once thanks to identical. The sanctioned order of payment quantity is typically up to 40%-50% of the property’s value. Your credit history and reimbursement capability are additionally thought of whereas granting an order of payment against the house as collateral.
Overdrafts against mounted Deposits
Getting the order of payment sanctioned against mounted Deposits (FDs) and life assurance policies as collateral is less complicated than to obtaining an order of payment sanctioned by keeping your home as collateral. One of the explanations is that property analysis takes time. Order of payment against FD is desirable for the investor too because the client’s FD account is with the investor and therefore the investor is aware of the customer far better. If you avail AN order of payment against your mounted deposit, then you're eligible for the next proportion of sanctioned amounts, approx. 75% rate charged is additionally less if you retain FD as collateral. Typically banks charge a pair of a lot of interest than the interest you're earning from the same mounted deposit if you retain the FD as collateral.
Overdrafts against policy
If you gift your policy as your order of payment collateral then the sanctioned quantity depends on the surrender worth of your policy. The Loan to the worth of a policy is bigger than LTV ( Loan To worth ) of mounted Deposits, i.e. you get more cash sanctioned from the bank if you retain your policy as collateral rather once you keep your FD of identical quantity as collateral.
Overdrafts against Equity
Equity isn't abundant amused as a possibility for collateral but it's attainable to realize the order of payment facility through it. The rationale being that equity relies on the market and so its worth fluctuates. This is often why the share sanctioned for the order of payment against equity as collateral is a smaller amount.
Overdraft against regular payment
Banks additionally provide an order of payment against your regular payment. You'll get an order of payment limit up to 2-3 times of your regular payment however that will vary from bank to bank. To avail such AN order of payment you wish to possess a regular payment account with the same bank. Such a facility is additionally known as a short-run loan facility.
Additional Resources:
