An overdraft account is a credit facility that allows money to be withdrawn from a savings or current account, even if the balance is zero or below. An overdraft facility is a form of credit limit extension provided by banks. The sanctioned limit is considered to be 'overdrawn'.

Each customer is allocated an authorised overdraft limit based on his or her relationship with the bank. The customer may withdraw funds up to the specified amount. Banks impose interest solely on the amount used from the overall sanctioned limit, which is renewed every 12 months.

OD Interest Rate

The interest rate offered by the bank on OD is based only on the amount withdrawn from the entire sanctioned limit. It varies by lender and is determined by the amount of the required overdraft, the account balance in your savings or current account, and your existing relationship with the individual bank.

Features Of Overdraft Account

• The bank sets an overdraft limit that is unique to each customer.
• Bank overdraft is a feature available to savings and current account holders.
• Overdraft withdrawals are permitted at any time up to the allotted limit.
• However, interest is calculated only on the used overdraft amount, not the assigned limit.
• An overdraft facility normally has an annual cost; you can cancel it anytime.
• The borrowed amount must be repaid within a specified time frame, usually within 12 months or as determined by your bank.
• There is normally no prepayment penalty with an overdraft facility.

Types Of Overdraft Accounts

• Overdraft Against Savings Account

If you have a savings account with your bank, they may also offer you an overdraft facility. The overdraft limit, minimum EMI amount and relevant interest rate may differ from one bank to the next and from one customer to the next.

• Overdraft Against Salary

Many banks provide overdraft protection to customers with a salary account. The bank overdraft threshold could be up to three times the monthly account amount, subject to the bank's terms and conditions and, among other things, the account holder's salary.

• Overdraft Against Insurance Policies

Several banks provide overdrafts against specific life insurance policies (such as traditional policies or endowment plans). The maximum allowable loan-to-value ratio is typically 85% of the eligible insurance policy's surrender value, subject to the bank's terms and conditions.

• Overdraft Against Fixed Deposits

Some banks additionally provide overdrafts against fixed deposits, allowing eligible depositors to withdraw a specified amount. The overdraft repayment time may differ depending on the bank and the customer's eligibility.

Wrapping Up

An overdraft facility offers its customers financial flexibility in the form of extended credit lines. A bank overdraft is a type of short-term financing allowing a bank account user to take or spend more money than is available. This credit extension can be utilised to cover an emergency or to meet short-term obligations. But keep in mind that it is a type of debt you owe to the bank that must be paid back along with interest charges on time.

Other financial services and products are available exclusively to salaried individuals. For instance, Fi, and its licensed partner Federal Bank, provides a salary account with many benefits. You get 2% cash back when you shop using Fi — with UPI or Debit Card. 4x Fi-Coins on all your spends via Fi — all of which you can redeem for vouchers, cool merch, etc. Of course, it provides exclusive deals & gift cards from top brands like Amazon, Swiggy & more. Other perks include no minimum balance, a free VISA Platinum debit card with zero forex charges, priority customer service & more.

Frequently Asked Questions (FAQs)

1. What are the types of overdraft accounts?

The types of overdraft accounts are as follows:

• Overdraft Against Savings Account
• Overdraft Against Salary
• Overdraft Against Insurance Policies
• Overdraft Against Fixed Deposits

2. What are the features of an overdraft account?

The following are the features of an overdraft account:

• The overdraft facility functions effectively as a credit line.
• It enables individuals or business owners to withdraw funds from a savings or current account even if the balance is zero.
• Interest is only levied on the amount that has been overdrawn, not on the amount that has not yet been withdrawn.