Everything you need to know - Overdraft facility

Posted by Trishya Sharma on February 28th, 2020

Do you know what overdraft facility is?

 An overdraft facility is a kind of financial tool that is beneficial for resources that are related to finances. Overdraft facilities are often provided to paid experts by various private lenders, and funds can be taken away to specific fixed limits. 

Do you know how the overdraft facility works for paid workers?

To understand everything about an overdraft facility, you must know that it is a kind of loan in which you are only bound to pay the total interest of the amount that you have utilized. Additionally, interest on an amount that you withdraw keeps on charging for the time you keep it. For instance, if you have decided to have an overdraft facility of ₹ 2, 00,000, and you have only used ₹ 40,000 in 40 days, then you are bound to pay interest for 40 days only that would be your interest on the withdrawn amount, ₹20,000.

A specific limit of overdraft is set each time while making a payment to the moneylender, and you attach the approved amount for the overdraft to your current or savings account. Later, you can create as many withdrawals as per your needs that stay in the pre-planned limit.

What are the essential characteristics and structures of the overdraft facility?

Following is a shortlist of some of the basic features of overdraft:

1. The credit limit

2. The Rate of interest

3. No charges of partial payment

4. Nothing related to EMI

Although it has its own set of rules, you can be the one in benefit because of it. Overdraft facility are helpful in stressful situations such as at the time of the wedding or for educational purposes etc. Later, you can pay the interest for the borrowed amount as per the time limit. You won't have to pay attention to all the money that you took but only for the amount that you have utilized. 

All these features describe the nature of this advantageous type of loan. We get to learn that the amount of overdraft keeps on fluctuating based on individuals. Also, the rate of interest should be paid by the user for the utilized amount only. The preset limit of credit continues to decrease as the time goes on and you keep on withdrawing. Then, the interest is also calculated based on the balance that is reducing with each withdrawal. 

The best thing about this kind of personal loan facility is that you do not have to pay any additional charges at the time of making a loan but have a free hand to make the payment whenever you're comfortable to do and also for a limited time in which you have used it. 

Also, it must be made clear that in usual loans, the EMI (Equated Monthly Installments) method is used for the repayment of loans. In contrast, in an overdraft facility, there is no such thing as you're free to make payments anytime you want to according to your suitability.