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Banks are a popular choice for loans for both businesses and individual borrowers. These financial institutions have an established reputation and many value-added services that attract many customers, including business loan borrowers, to their offerings. One of the services gaining popularity is the overdraft loan facility.
What is an overdraft loan?
Overdraft loan, simply called the overdraft, is a facility that allows a person to withdraw money from his/her bank account even if the account balance is zero. Banks usually charge a fixed interest rate for overdraft facility and levies an interest rate for the money utilised. Loan repayment tenure is typically short for overdraft loan.
The overdraft facility is normally sanctioned for customers that have been clients of the bank for a long time and have a positive credit history. This facility is sanctioned on the basis of collateral you possess including fixed deposits, life insurance policies, house/property, equity holdings or salary. AS a business owner you can either apply for a business loan overdraft or a personal loan overdraft.
How does overdraft facility work?
Let us understand how overdraft facilities work with an example. Imagine you are an account holder at X Bank and your bank account is converted into an overdraft account. You have an upcoming vendor payment of ₹50000, but your account balance is at zero.
Since the bank has activated the overdraft facility for your account you can withdraw ₹50000 and complete your payment. A fixed interest rate will be charged as per your loan agreement for the amount you have withdrawn.
It could also be that your account balance is ₹1000 but the vendor payment is ₹6000. Even in this case you can withdraw ₹6000, and you will be charged interest on ₹5000 you have withdrawn.
Listed below are the features of an overdraft loan:
- An overdraft loan is given to account holders who have maintained an account with the bank for a long time.
- Either a savings account or a current account can be converted into an overdraft account
- The credit limit for an overdraft is predetermined and is based on your repayment capacity and credit score.
- The interest charged on the credit amount withdrawn from the account is fixed. It increases if you default on your payment due.
- Short term credit provided by the bank with a short repayment period.
Benefits of overdraft facility
There are multiple benefits you can reap if you have an overdraft facility activated for your account:
- Multiple withdrawals are allowed from your overddraft account until the predetermined limit
- You only pay interest for the amount utilised
- Interest is calculated using the daily reducing balance method. This means overdraft loans don’t have a fixed EMI and you are allowed to split the payments and repay the total amount due multiple times.
- The loan can be repaid with foreclosure charges
Eligibility for an overdraft loan
As mentioned before, you must be an account holder with the bank you wish to take an overdraft loan. You must have a good banking relationship with a positive credit history. Banks activate overdraft facility for your account based on your financial standing, business income and credit score.
Banks that offer overdraft and interest rates
Have a look at overdraft loan products offered by banks and NBFCs of India:
|Overdraft product||Minimum loan amount||Maximum loan amount||Interest rate|
|Tata Capital – Business Overdraft Loan||₹3 Lakh||₹75 Lakh||Starts at 12.5% p.a., for professionals and
15.5% p.a., for non-professionals
|Yes Bank – Smart Overdraft||₹10 Lakh||₹2 Crore||Depends on financial details of the customer|
|SBI – Time Deposit||₹5000||₹5 Crore||1% above the relative time deposit rate|
|ICICI Bank – InstaOD Plus||Not mentioned||₹50 Lakh||Determined based on the assessment of business, financials, loan amout|
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