Overdraft Facility (OD) – Features, Process to Apply & How it Works

An overdraft facility lets you borrow extra money from your bank, even if your balance is low. It works like a short-term credit line linked to your account. You can use the funds for urgent needs like bill payments, medical expenses or business cash flow.

For answers to the question, “What is an OD loan?” and to learn about the process to get one, read on.

What is an overdraft facility?

It’s a credit line that is sanctioned to an individual against their assets. This financial instrument lets you withdraw money from your current or savings account against a sanctioned OD limit. The bank sets this limit and levies an interest rate on this facility.
Remember that this limit and the rate of interest rate are determined based on: 

• Your account balance
• The nature of the asset you pledge as collateral
• Your financial stability 
• Your credit score and history
• Your relationship with the lender

You can pledge your FDs, insurance policies, shares, bonds, etc., as assets to avail of an overdraft facility.

Features of an Overdraft Facility

Here are a few key features of overdraft facilities:

• Linked to your account: The facility is usually tied to your savings or current account.
• Pre-approved limit: You can withdraw more than your available balance up to a set limit.
• Interest on usage: You pay interest only on the amount you use, not the entire limit.
• No paperwork each time: Once active, you can use it anytime without fresh approval.

Why is there a need for an overdraft facility?

Listed below are the reasons is to how an overdraft facility can support you when funds run low:

• Manages sudden expenses: Helps you deal with unexpected costs like medical emergencies or urgent repairs.
• Covers delayed income: Useful when your salary or business payments arrive later than expected.
• Avoids loan delays: You get instant access to extra funds without applying for a fresh loan.
• Supports low balances: Offers a quick cash buffer when your account balance isn’t enough.

This is when an overdraft account comes in handy. This facility is a great way to raise funds for the short term if used wisely.

How does an overdraft facility work?

With the overdraft facility, you can withdraw funds from your account even after your account balance reaches zero. The bank will set an overdraft or OD limit. You can withdraw cash and transfer funds via cheques, net banking, online banking, etc., within this limit. 

This pre-approved, short-term credit can help you manage your finances and fulfil all your requirements. Your bank will charge daily interest on the amount you withdraw from your account. You can prepay the overdraft amount along with the interest charges anytime to replenish your limit.

Know the Benefits of an Overdraft

This facility offers support when you need quick cash. Some of the top benefits include:

• Quick access to funds: No long process or waiting period involved
• Useful in emergencies: Helps you manage sudden expenses without stress
• Flexible usage: No restriction on the usage of funds 
• No fixed EMI: Repay based on how much and how long you use the amount

The Overdraft Limit

The overdraft limit is the maximum amount you can withdraw beyond your account balance. It’s not the same for everyone. Your bank sets this limit based on a few things. Factors include your income, how you’ve used your account and your repayment habits.

This limit can change over time. If your usage or credit score changes, the bank can increase or reduce it. So whether it’s ₹20,000 or ₹2 lakhs, your overdraft limit depends entirely on your financial profile.

Also Read: What is Demand Draft?

However, if you need quick and easy funds without pledging your assets as collateral, then Fibe’s Instant Personal Loan can help you. We offer personal loans of up to ₹5 lakhs within minutes with minimum documents and a quick application process.
Download the Instant Loan App or log in to our website and get started. 

FAQs on the Overdraft Facility

What is an overdraft facility in simple words?

The overdraft facility is one that allows you to withdraw funds from your bank account despite having an account balance of zero. The bank, in turn, charges interest on the amount withdrawn.

Is overdraft good or bad?

It depends on how you use it. An overdraft can be helpful during short-term cash crunches. But if you overuse the facility or don’t repay on time, it can lead to extra charges. Which could hurt your credit score.