OD Limit or Overdraft Limit is an Instrument or Financial Facility that enables you to withdraw money from your bank account (savings or current), even if you do not have any account balance. Like any other credit facility, the bank levies an interest rate when you avail the overdraft facility. You typically have to pay a fixed interest rate to avail an overdraft limit.
What is OD Limit or Overdraft Facility ?
An OD Limit or Overdraft Limit allows customers to use or withdraw money from their account up to the approved limit. It works like an approved loan where the interest is charged only on the utilized amount. An OD Limit or Overdraft Limit helps individuals and self employed businessmen to resolve short term cash flow issues. Such facility is also called a short-term loan facility.
How does overdraft facility work ?
The overdraft facility provided by various Banks and Financial Institutions may vary which can be used to reduce the amount of EMI on loans. Under the overdraft facility, borrowers can use the additional money as a loan through their savings or current account. The surplus amount in excess of the EMI deposited in that account is treated as prepayment of the loan which can reduce the outstanding principal amount.
Since the outstanding loan amount is reduced, the interest amount is also calculated on the lesser amount. Thus the interest expense of the loan is reduced. The surplus amount added to the overdraft account can be withdrawn at any time and the outstanding balance is rebalanced accordingly.
With the launching of Pradhan Mantri Jan Dhan Yojana, overdraft facility has become very popular. Under this scheme, an individual can avail an overdraft up to 4 times the value of his accent balance. However, there are certain conditions in the case of a new account holder which seems to be eligible for the bank overdraft facility such as requiring the applicant not only to maintain the balance in their account, but also for regular transactions for a fixed period of six months.
To avail the overdraft facility under this scheme, it is necessary to link the individual account with the Aadhaar card. Minors or people availing Kisan Credit Card are not eligible for this scheme.
A Salaried Person can also avail of overdraft facility on his salary accounts. There are certain conditions that if the salary should be regularly credited to their account, the salary should be 25000 or more. Individuals do not need any collateral to get overdraft facility against their salary accounts but they can get credit up to 3 times the current salary.
Overdraft facility against fixed deposits can also be easily availed as compared to other overdrafts taken against collateral like assets. In this case the required documents are very less because the banks already know about their credit history, bank balance etc. They may also get the benefit of obtaining higher value of overdraft limit against fixed deposits.
Features of the OD Limit or Overdraft Facility
The features of the overdraft limit are as follows :-
- Banks offer overdraft facilities over a pre-determined limit, which may differ for every borrower.
- Overdraft limit account is a running account in which you can deposit/ withdraw amount anytime up to the specified limit.
- The bank levies the interest on the overdraft amount used by the borrower at predefined rate. The interest is calculated daily and billed/debited to your on monthly basis. The interest amount increases if you default on paying the due overdraft amount.
- Unlike most loans, in which you have to pay a prepayment penalty to repay the loan before the tenure. Banks do not levy any prepayment fee on the overdraft limit. You can pay the overdraft amount cumulatively without any prepayment penalty.
- You can repay the overdraft, in different amounts, whenever you have the money. The system of EMIs, which is prominent with most loans, does not exist in the case of overdraft limits.
- There is no minimum monthly repayment schedule in case of overdraft loans. Only this outstanding amount must be within the overdraft limit.
- Joint borrowers may avail overdraft limits. However, both the applicants are equally responsible for repaying the sanctioned Overdraft limit.
Which types of collateral is accepted by Banks for OD Limit or Overdraft Facility ?
- OD Limit or Overdraft Facility against Residential / Commercial / Industrial Property.
- OD Limit or Overdraft Facility against fixed deposits.
- OD Limit or Overdraft Facility against life insurance policy.
- OD Limit or Overdraft Facility against equity holdings.
- OD Limit or Overdraft Facility against salary.
Points to be considered while taking a OD Limit or Overdraft Facility
- Rate of Interest – Rate of interest is higher than fixed loans / term loans like Loan against property (LAP). Therefore if you generally don’t have extra money to park in OD Account then you should opt for LAP.
- Processing Fees – Processing fees charged by bank is normally .25% to 1.50% and could bargain on it.
- Minimum Usage Condition – Some Bank levies charges if the OD Account is not utilized up to a certain limit. For example you take an OD account of Rs. 10 lakhs and average use during the year is not 30% i.e Rs. 3 lakh then charges are levied.
- Account Closing Charges – Some Banks also levies a percentage of loan amount as charges called foreclosure charges if you want to close the account. This generally ranges from 1% to 2%. If your bank levies 2% foreclosure charges then its not beneficial for you to shift to other Bank even if other Bank gives you a better interest rate.
- Interest Servicing – Some Banks required the customers to deposit the interest of the month in the account through cash or cheque deposit within a few days of the next month.
Required Documents for OD Limit or Overdraft Facility
| OD Limit : Required Documents for Salaried
Main Applicant
Co-Applicant
Property Documents Minimum 13 Years ownership transfer chain or Other Collateral |
Overdraft Facility : Required Documents for Self Employee Business Owner
Main Applicant
Co-Applicant
Property Documents Minimum 13 Years ownership transfer chain or Other Collateral |
OD Limit : Required Documents for Self Employee Professional
Main Applicant
Co-Applicant
Property Documents Minimum 13 Years ownership transfer chain or Other Collateral |
