Overdraft Facility

An overdraft facility, commonly known as an overdraft, is a financial arrangement that allows account holders to withdraw more money from their bank account than what is actually available. It acts as a flexible credit line that can be accessed whenever needed, providing a cushion to manage temporary financial shortfalls. Understanding the key features and aspects of overdraft facilities is essential for making informed financial decisions.

1. How Overdraft Facilities Work

Credit Limit: The bank assigns a credit limit to the account holder, indicating the maximum amount that can be overdrawn. The credit limit is based on factors like credit history, income, and relationship with the bank.

Flexible Withdrawals: Account holders can withdraw funds up to the approved credit limit, even if their account balance is zero or negative, effectively allowing short-term borrowing.

Interest Rate: Interest is charged only on the overdrawn amount, not the entire credit limit. The interest rate is typically higher than that of a regular loan.

Repayment: The overdrawn amount must be repaid within a specified period, often with a flexible repayment schedule.

2. Key Components of Overdraft Facilities

Credit Limit: The maximum amount the account holder can overdraw, typically based on factors like income, credit history, and the bank's policies.

Interest Rate: The rate at which interest is charged on the overdrawn amount, often varying among banks and based on market conditions.

Repayment Terms:The duration within which the account holder must repay the overdrawn amount, often with flexible repayment options.

3. Benefits of Overdraft Facilities

Financial Flexibility: Provides a financial cushion to manage unexpected expenses or temporary cash flow gaps.

Immediate Access to Funds: Enables quick access to funds without the need for a formal loan application process.

Interest on Utilized Amount: Interest is charged only on the overdrawn amount, potentially resulting in cost-effective short-term borrowing.

Customizable Repayment: Repayment terms are often flexible, allowing account holders to repay the overdrawn amount based on their financial capacity.