Overdraft Account - Interest Rate, Features, Types & Benefits

An Overdraft (OD) Account is a revolving credit facility linked to a bank account that allows you to withdraw money up to a pre-approved limit even when your account balance reaches zero.

• Key Interest Rule: Interest is charged only on the amount utilised and for the duration of use, generally calculated on a daily reducing balance.
• Repayment Flexibility: There is generally no fixed EMI structure. You can deposit funds to reduce the outstanding amount and restore the available credit limit.
• Overdraft Against Fixed Deposit: An OD against FD allows you to use your Fixed Deposit as collateral for a credit facility, with the exact borrowing limit and interest rate determined by the lender.

An overdraft helps with short-term cash flow, but for better returns, park idle funds in a Bajaj Finance FD and earn up to 8.15% p.a., Check FD Rates!

An overdraft account functions as a flexible credit facility attached to your bank account. It can provide access to funds for short-term requirements such as business payments, working-capital gaps or unexpected expenses.

How does an overdraft work?

1. Limit sanction: The lender approves a maximum borrowing limit based on factors such as income, credit history, banking relationship or pledged collateral.
2. Access to funds: You can draw money up to the sanctioned limit through the channels permitted by the lender.
3. Daily interest accrual: Interest is generally calculated on the utilised amount. For example, if your sanctioned limit is Rs. 5 Lakh and you use Rs. 1 Lakh for 10 days before repayment, interest is calculated on Rs. 1 Lakh for those 10 days.
4. Limit restoration: When you deposit money and reduce the outstanding amount, the available overdraft limit increases accordingly, subject to the facility terms.

Revolving credit line

An overdraft is generally a revolving facility. As amounts are repaid, the available limit can become available again during the sanctioned period, subject to the lender's terms.

Flexible repayment

Unlike a conventional term loan, an overdraft may not require a fixed EMI schedule. The borrower can repay the utilised principal as permitted while servicing applicable interest and other charges.

Daily interest calculation

A simplified calculation for daily interest is:

Daily Interest = (Utilised Overdraft Amount × Annual Interest Rate) ÷ 365

The actual calculation method, billing cycle and applicable charges depend on the lender and facility agreement.

Charges depend on the lender

An overdraft may involve processing, renewal, annual maintenance or other charges. Any foreclosure or prepayment charge depends on the specific facility and lender terms.

Overdraft facilities can broadly be classified as secured and unsecured, depending on whether collateral is provided.

Overdraft against Fixed Deposit

An Overdraft against Fixed Deposit allows a borrower to pledge an FD as collateral and access funds without necessarily closing the deposit prematurely. The borrowing limit and interest rate vary by lender.

Overdraft against salary

A salary-based overdraft may be available to eligible salaried customers, depending on their employer, income, banking relationship and credit profile.

Overdraft against property

A property-backed overdraft uses eligible property as collateral and may provide a higher credit limit than an unsecured facility. The sanctioned amount depends on the property value, borrower profile and lender's loan-to-value criteria.

Jan Dhan overdraft

Eligible Pradhan Mantri Jan Dhan Yojana (PMJDY) account holders may have access to an overdraft facility subject to the applicable government and banking rules and eligibility conditions.

When an unexpected cash requirement arises, an overdraft against an FD can provide liquidity without necessarily requiring premature liquidation of the deposit.

The basic mechanism is:

• FD remains as collateral: The deposit is pledged or lien-marked in favour of the lender.
• Credit limit is provided: The lender determines the available overdraft based on a specified percentage of the FD value.
• Interest applies to utilisation: Interest is generally charged on the amount actually borrowed, according to the facility's applicable rate.
• Deposit continues according to its terms: The underlying FD remains subject to its original terms, including its applicable interest and maturity conditions.
• Repayment restores availability: As the utilised amount is repaid, the available credit limit can increase again, subject to the facility terms.

The exact loan-to-value ratio, interest rate, fees and repayment conditions differ between lenders.

A Fixed Deposit can serve both as an investment and, where a lender offers the facility, as collateral for borrowing.

For example, an eligible Bajaj Finance Fixed Deposit can be used to access a loan against the deposit without necessarily requiring premature liquidation. The applicable borrowing limit, interest rate, tenure and other terms are determined by the lender.

A Fixed Deposit can therefore help separate two requirements:

1. Investment: The deposit continues according to its applicable terms.
2. Liquidity: A loan or overdraft against the deposit can provide access to funds when required, subject to eligibility and lender approval.

Fixed Deposit calculator can help estimate the maturity amount or interest income based on the deposit amount, tenure, customer category, interest rate and payout option.

For a non-cumulative deposit, periodic interest payouts can provide regular cash flow. With a cumulative deposit, interest is retained and paid along with the principal at maturity, according to the applicable FD terms.