What is an Overdraft Facility in a Personal Loan, & How Does it Work?

When you create an account at a bank, you can access a wide range of banking products and services. For your convenience, the bank will issue you a passbook and a chequebook to keep track of your money and finances.

In addition, you will have access to a debit card that can be used at ATMs, the internet, mobile banking, etc. The bank’s overdraft program is another option for those in need of quick cash.

Let us find out what an overdraft facility is in a personal loan. Here’s the complete rundown of this facility in personal loans.

What is an Overdraft Facility in a Personal Loan?

Overdraft facilities are a type of short-term loan with a set schedule for paying it back. The terms and conditions of the bank will tell the lenders how much interest to charge the borrower.

Most lenders who offer overdraft services offer fixed interest rates instead of rates that change based on the market.

With an overdraft facility in a personal loan, you can use money in your checking or savings account even if it isn’t available. This is something that almost all banks offer. 

How to Request an Overdraft Facility in a Personal Loan

Borrowing from an instant overdraft works like borrowing from a bank or NBFC. Some customers may have overdraft privileges given to them automatically, while others will have to ask for the service. 

When customers’ negative balance triggers the overdraft facility, their overdraft privileges start immediately. If a customer wants to use a temporary overdraft, they must ask the lender for permission.

This can be done in writing or through the lender’s website. Collateral is put up for a secured overdraft, while no security is given for an unsecured overdraft.

Features of the Overdraft Facility in a Personal Loan

Credit Limit Approval

The amount of an overdraft is greater than the limit set by the bank. Each borrower may have a unique maximum loan amount.

Rate of Interest

All overdraft balances are subject to the interest rate. It’s computed daily and added to your bill at the end of the month. If you don’t pay your overdraft on time, the interest will be compounded each month on top of the principal.

Zero Prepayment Charges

It is common to assess fees for the prepayment of a personal loan. But that’s not how the overdraft service works. The overdraft fee is waived when the borrowed funds are repaid early. 

No Monthly Payment Instalments

You don’t have to make monthly payments on the overdraft balance. The borrowed funds can be repaid in one go as well. In other words, you won’t have to pay back the overdraft fee like you would a personal loan. 

Monthly Limit 

There is no set payment requirement for an overdraft, but your balance must remain below the monthly overdraft limit. Overdraft repayment shouldn’t be put off for too long, as that can harm your credit score.

Joint Borrowers 

If you and your family member apply for and receive an overdraft simultaneously, you will be fully liable for the total amount. 

Both personal loan applicants are liable for the prompt payback of the overdraft regardless of the amount borrowed. If one of the borrowers cannot make payments or defaults, the other borrower is responsible for the whole balance.

In case of default, all borrowers’ collaterals are at risk, not only those whose overdrafts are larger.

How Does an Overdraft Service Work in a Personal Loan?

If the bank agrees to open an overdraft account, the requested money will be sent to your account immediately. And the funds will be available for withdrawal at any time. 

Overdraft privileges will be activated if a new approval has been requested and then granted by the bank. Overdrafts are subject to limits set by the bank.

When one uses an overdraft service, the account balance increases, while the ratio decreases when money is deposited. 

An overdraft allows the borrower the flexibility to pay back the lender in full or in instalments. After paying back, one can withdraw as needed until the overdraft limit is reached. 

When a borrower uses an overdraft facility via their bank account, the bank does not have any security against it. If the borrower takes some assets as collateral, the overdraft is classified as a secured overdraft. 

It’s important to know that banks can have varying interest rates and overdraft limitations based on the type of security provided. Overdraft fees are found daily because the overdraft amount isn’t repaid on a set schedule. 

An overdraft limit can be reduced by depositing to a bank account. This immediately reduces one’s outstanding debt. As a result, interest must be calculated every day due to the possibility that the loaned amount accounting will change each day.

Conclusion

An overdraft facility is beneficial in times of money need. The repayment terms for overdraft loans offered by banks are many times reasonable. You should find as much information as possible about overdraft facilities and their limits before using this service from the bank. 

Every borrower is limited to one overdraft loan, which must be repaid regularly. Piramal Finance has some helpful blogs you can check out if you can’t decide between an overdraft and a personal loan. They also offer a wide variety of products and services for you to look at.