Availability of a loan is a powerful financial instrument with one of the most extended tenure limits. Over the years, it can become a massive burden on your pocket. Also, taking a loan while having an existing loan can become difficult. To avoid such a scenario, you can avail yourself of the overdraft facility. The overdraft facility allows borrowers to withdraw amounts more than the credit limit depending upon the loan amount. You can pay the borrowed amount in the set tenure. You can also deposit the amount that will count as a prepayment on the loan amount that will help you lower your financial burden.
What are the types of overdraft loans?
When applying for an overdraft loan, you need to put something as collateral. Depending upon the thing you put up as collateral, the following are the types of the overdraft loan:
- Overdraft against property: You can put up your property or the property on which you have an existing loan amount as an overdraft loan collateral. Bank will not immediately release the funds, but it will reassess the property before that. Then based on the value of the property, 40%-50% of the amount will be settled as the overdraft loan amount. Your CIBIL score and repayment history will highly influence your chances of getting an overdraft loan approved.
- Overdraft against fixed deposits: It is pretty easy to get an overdraft loan approved on the fixed deposits than with other collateral. Banks do not need to assess anything when availing of an overdraft loan against the fixed deposits. Also, they already know how much money you will make at the end of the fixed deposit tenure. Therefore, overdraft loans against fixed deposits have a higher percentage of getting loan amount sanctioned. The interest on the overdraft loan against the fixed deposit is only 2% -5% higher than the interest you are getting on the fixed deposit.
- Overdraft against insurance policy: The loan against the insurance policy is possible. However, the amount you get sanctioned as an overdraft loan is the surrender amount of the insurance policy. Depending upon the amount and the type of policy, you will get an overdraft. Compared to an overdraft loan against the fixed deposit loan amount, getting sanctioned for the overdraft loan against the insurance policy is higher.
- Overdraft against equity: Some banks, non-banking financial companies, or NBFCs may decline the overdraft loan against the equity funds. Equity funds promise higher returns for the investors, and they are subject to market risk. Therefore, overdraft loans against the equity funds are also considered the high-risk category loan.
- Overdraft against salary: It is one of the most common types of overdraft loan facilities. However, only salaried individuals with a salary account in the bank can avail themselves of this overdraft facility. Some banks allow up to 2 to 3 % of the salary amount as an overdraft loan. The tenure for the overdraft loan against the salary can be of the short term. Your work type and salary profile can play a huge role in getting an overdraft loan against the salary sanctioned.
What are the features of the overdraft loan?
Following are the features of the overdraft loan:
- Approved credit limit: Overdraft loans can be availed only on the predetermined credit limit depending upon the existing loan amount. It is determined by the bank and varies from borrower to borrower.
- Interest rates: Overdraft loan has a different interest rate than a home loan or personal loan. The interest rate of the overdraft loan is calculated daily. You need to pay the minimum amount each month on the predetermined date. If you fail to make the monthly payment, the unpaid interest is added to your principal due amount.
- Prepayment charges: You will have to pay the prepayment charges when you prepay the loan amount or the EMIs available under the fixed interest rate. However, you do not pay prepayment charges if you prepay your overdraft loan amount.
- Repayments do not require EMI: There are no Equated Monthly Instalments fixed like the home loan. Therefore, you do not make a fixed amount each month. You can repay or prepay the loan amount with whatever amount you like. All you need is to make the minimum payment each month to avoid penalties.
- Joint borrowers are allowed on overdraft: You can avail of overdraft loans jointly as well as singularly. If you avail it jointly, both applicants are equally responsible for paying the loan amount. If one defaults on the payment, another applicant must repay the whole amount.
What documents are required for the overdraft loan?
Even if you have an existing loan with the bank, you may have to provide documents for the overdraft loan. The banks require the following documents for the overdraft loan:
Overdraft loans are an excellent financial instrument that allows borrowers to get extra loans without worrying about additional EMIs. You can make the repayment or the prepayment of the loan however and whenever you wish to. This facility can be helpful in times of need.