Everything You Need to Know About Overdraft Facility

What is an overdraft facility? 

An overdraft facility is issued by the lender through an applicant and can take a certain amount when the account balance reaches zero. The lenders charge interest on the borrowed amount. It is the best component to have on a business loan as it lets an applicant cover the loss in the cash flow. The overdraft facility is provided by mostly every bank, financial institution, or NBFCs. It is a short-term loan that has to be payback in a specific period set by the banks. It works as additional credit offered by the lenders. Any holders with savings and current accounts should opt for an overdraft facility because this facility helps to withdraw money even when an account reaches zero. 

Overdraft facility – Features 

• Credit limit – The credit limit of every applicant differs from bank to bank. It is given over a pre-decided limit on the borrower's relationship with the lenders. 
• Prepayment charges – When an applicant wants to pay back the borrowed amount by overdraft, they do not have to pay prepayment charges. 
• Rate of interest – The interest rate of an overdraft loan is charged on the amount that is used for overdraft. The amount of interest will be added to the principal amount at the end of the month. The interest rate is evaluated on the daily basis on the new principal. 
• Repayment – Repay amount of an overdraft is not paid in Equated Monthly Installments. An applicant can pay back the overdraft whenever they have money and are capable to pay.  
• No installments – The lenders do not require the repayment of the amount by Equated Monthly Installments for an overdraft facility. An applicant can repay the money whenever he has money along with overdraft fees.  

Overdraft facility interest rate 

The interest rate for bank overdraft facility is 9.00% onwards.  

Rate of interest and processing fees by top banks  

Eligibility Criteria of Bank Overdraft Facility 

Eligibility for an overdraft facility depends on several factors such as business turnover, age of an applicant, monthly salary, creditworthiness, repayment history, total work experience, etc. 

• The age limit of an individual must be 22 to 60 years of age. 
• Working experience – Minimum 2 years. 
• The monthly income of the applicant must be a minimum of 30,000. 
• Minimum 1 year of experience in an existing company. 

Documents Required for Overdraft Facility 

Given below are the documents that are required for applying for a Bank Overdraft facility: 

• 2 Passport-sized photographs 
• Aadhar card + Passport 
• Copy of PAN Card 
• Salary slips of last 3 months + Appointment letter  
• Cheque in Favour of bank for processing fee 
• ITR with computation of income of last 3 years form – 16 (if file) 
• Bank statement of recent 1 year (salaried account) 
• Sanction letter and loan schedule (if running) 
• Complete property documents with MAP + ATD & Chain 

EMI Calculator for Bank Overdraft Facility 

EMI or Equated Monthly Installment is a set of amounts that are paid by an applicant to the lender every month. 

Mathematical formula to calculate EMI: 

             EMI = PV×i×[(1+i)n(1+i)n?1] 

Where, i = Rate of Interest 

            PV = Loan amount 

            n = Tenure (years or months) 

For example, 

An applicant can take a loan of Rs. 40 lakhs for 17 years at an interest rate of 10% p.a. then, what will be the EMI? 

Hence, knowing the facts about bank overdraft facilities, compare interest rates by Top banks to get the best deal for the loan. Apply through financeseva. 

Also read: - Bank Guarantee Process, Eligibility, and its Advantages