What is Overdraft? Meaning, Benefits & How It Works?
Ever swiped your card or written a cheque, only to realise later that your account didn’t have enough funds? This is where an overdraft can save the day. So, what is overdraft? It's a short-term loan facility offered by banks that allows you to withdraw more money than you have in your account. Think of it as a financial cushion during emergencies. Whether you’re a business owner or salaried individual, overdraft protection gives you room to breathe.
What is an Overdraft Facility?
The overdraft meaning is simple: it’s a borrowing arrangement where the bank lets you withdraw funds even after your account balance hits zero. Unlike term loans, there’s no fixed EMI. You only pay interest on the amount you use, and the facility is often linked to your current or savings account.
Businesses often utilise overdraft loans to bridge cash flow gaps, cover urgent expenses, or settle vendor payments.
How Does an Overdraft Loan Work?
When you opt for an overdraft loan, the bank sanctions a limit (say INR 5 Lakh), and you can use any portion of it when your account runs short. You’re charged interest only on the amount you use, and not the entire limit.
Let’s say your account is low, but you issue a cheque for INR 1 Lakh. With overdraft, the bank honours it, and you repay that amount later with interest.
Key Features of an Overdraft Account
Overdraft account features make it a flexible financial tool for individuals and businesses:
- Credit Limit: Pre-approved based on income, account history, or collateral.
- Flexibility: Withdraw funds as needed, up to your assigned limit.
- Interest: Charged only on utilised amount, not entire limit.
- No Fixed EMI: You repay as per convenience within the agreed terms.
- Renewable Facility: Usually valid for 1 year and renewable thereafter.
- Linked Account: Tied to your savings, current, or business account.
Also Read: How Can a Small Business Benefit from an Overdraft Facility?
Types of Overdraft Facilities in India
There are several types of overdraft options available from banks in India, depending on the borrower's profile and the security provided.
Secured Overdraft
This is backed by collateral, such as fixed deposits, insurance policies, or shares. The overdraft limit depends on the value of the security provided. It usually comes with lower interest rates.
Unsecured Overdraft
Offered without any collateral, usually based on your income or creditworthiness. It's riskier for the lender, so interest rates are typically higher.
Overdraft Against Property or FD
- Property: You can avail an overdraft loan using your owned property as collateral. The limit is determined as a percentage of the property’s value.
- Fixed Deposit: Banks may allow you to withdraw when your savings fall short, provided your FD is secured. Interest is usually slightly higher than what you earn on the FD.
Benefits of Using an Overdraft Facility
Why choose an overdraft over a regular loan? Here are some top overdraft facility benefits:
- Immediate access to extra funds for emergencies or business needs.
- You pay interest only on what you use, not the full sanctioned amount.
- No burden of fixed monthly repayments; flexibility to repay any time.
- Helps maintain healthy cash flow for businesses and individuals.
- Typically, quick approvals for account holders with strong relationships or collateral.
Overdraft vs Term Loan – Key Differences
Understanding the difference between overdraft and loan can help you make the right financing decision.
| Criteria | Overdraft | Term Loan |
| Repayment | Flexible | Fixed EMIs |
| Interest | Only on the amount used | On total loan amount |
| Tenure | Renewable yearly | Fixed tenure (1–5+ years) |
| Best For | Short-term needs | Long-term goals |
| Collateral | Optional | Often required |
Who Should Consider an Overdraft Loan?
An overdraft loan is suitable for:
- Entrepreneurs/businesses needing working capital support
- Individuals facing temporary cash shortfalls
- Account holders with regular income or assets to provide as collateral
- Self-employed professionals managing fluctuating cash flows
Also Read: Overdraft Facility Better Suited for Your Business Than a Term Loan
Conclusion
Understanding what is overdraft loan can help you better manage short-term cash needs without taking on long-term debt. It acts as a safety net, ensuring you never miss an important payment due to temporary fund shortages. Whether you’re covering unexpected bills, managing business gaps, or complementing a business loan for added liquidity, the overdraft facility offers speed, flexibility, and control.
Just remember, it’s not free money. Use it wisely, repay on time, and avoid turning this credit line into an expensive habit.
Check overdraft-friendly options or apply now to explore flexible borrowing solutions.
FAQs
Q.1. What is the full meaning of overdraft in banking?
A. The overdraft facility meaning in banking, refers to a credit arrangement where the bank allows you to withdraw more money than what is available in your account. It acts as a short-term loan that helps you cover urgent expenses when your balance is insufficient.
Q.2. How is an overdraft loan different from a personal loan?
A. A personal loan is a fixed-term loan with EMIs, interest on the total amount, and a defined repayment schedule. An overdraft loan, on the other hand, offers flexible borrowing; interest is charged only on the amount actually used, and there are no fixed repayment amounts.
Q.3. Can individuals apply for an overdraft facility?
A. Yes, individuals can apply for an overdraft facility if they meet the bank’s eligibility criteria. Salaried professionals, business owners, and self-employed individuals with a stable income or financial security, such as fixed deposits, can avail themselves of overdraft facilities.
Q.4. Is overdraft a type of credit facility?
A. Yes, an overdraft is a credit facility provided by banks. It allows account holders to borrow money up to a set limit when their balance is low or zero, functioning like a short-term line of credit.
Q.5. Are there charges on overdraft usage?
A. Yes, overdraft usage typically attracts interest and may also incur processing fees, renewal charges, or penalties for exceeding the limit. Charges vary by bank and whether the overdraft facility is secured or unsecured.
Q.6. What is the interest rate on an overdraft loan?
A. The interest rate on an overdraft loan depends on the type of security offered, borrower profile, and bank policies. Rates are usually lower for secured overdrafts and can range between 8% to 18% annually. Interest is charged only on the amount drawn, not the full limit.
Q.7. How can I apply for an overdraft loan online?
A. To apply for an overdraft loan online, visit your bank’s official website or use its mobile banking app. Fill in the required details, upload necessary documents, and submit the application. You can also contact us for support in applying for an overdraft facility.
Disclaimer:
The contents of this article are for information purposes only & not a financial advisory. For more details, please refer to the product or service document and/ or connect with our customer representative prior to making any financial decision. The information is subject to update, completion, revision, and amendment and may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject Godrej Capital or its Affiliates to any requirements. Godrej Capital or its Affiliates shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.
Financing through Godrej Finance/Godrej Housing Finance Limited. Product Terms & Conditions apply, for details visit www.godrejcapital.com
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