Caught up from all four sides, seems like the doors are closed, in today’s time this usually happens at the
time of a personal financial crisis. This situation I not unknown to anyone, at some or the other time we
all have faced it in our lives. During that phase we search for some kind of financial help that is available
so that the particular situation can be dealt with. People tend to borrow money from friends, relatives
and if not any acquaintance then they turn towards the bank to get some credit. There are many types
of credits that are available through a bank these are in the form of bank loans, debit or credit cards,
etc. The only problem with such a credit is that the interest rates are quite high. This option is usually
explored when the emergency funds kept aside are not sufficient to take care of the current short term
financial requirements. Other than this there is also one more thing that the bank can offer you, which is
known as the overdraft facility.
So what is an Overdraft Facility?
While not many of us are aware of it, an Overdraft facility is something that can cater to our quick
financial needs which are of a short tenure. Banks give quick approvals to such a creditand of course this
kind of lending is secured, which means that you will have to keep your assets as security with the bank
to avail this benefit.
Now we are going to discuss in detail about this facility and on what assets can you avail such a credit.
An Overdraft facility is nothing but a sort of loan which is given to a person by the bank usually who
already has an account with them, on behalf of the security that the individual has kept with the bank.
For security you could give anything from your house to your car to your insurance policies, bank FD’s,
share and bonds, debentures, etc. The rate of interests on these securities though varies from one bank
Let’s clear the concept of collaterals: What are they?
Putting your house up as a security:
If you use your house as collateral, it would be valued by the bank after proper surveyand then approve
an overdraft facility up to the limit of 50%-60% of the estimated value of the house, the person’s credit
record, and his repayment capacity. For example the estimated value of the property comes out to be
Rupees 1 crore, which makes you eligible to avail Rupees 60 lakhs overdraft. This amount will however
not be given immediately. After the credit has been sanctioned, one can withdraw the money as and
when required. The interest becomes due from the time the facility has been approved till the time you
withdraw the amount from the overdraft account. The interest rates for credit against property range
from 12% to 14% per annum.
Bank FD as security:
If you put your fixed deposits as a security with the bank, then you will be eligible to get an overdraft
limit which is almost 70% of the value of the fixed deposit, and is also more than that of loan against
property. To add to that the rate of interest charged by the banks are also lower as compared to house
as security. When an overdraft facility is taken against the fixed deposit, then the banks would charge
1% more than that rate of interest which is payable on the fixed deposit scheme. For instance the fixed
deposit is earning you an interest rate of 8% per annum, and then you would have to pay 9% per annum
as an interest to this overdraft facility you avail.
Put Life Insurance Policy as security:
If you put your life insurance policy as security with the bank, you will be eligible to take an overdraft
facility which is more than that of the facility which you could avail against your house property. Mostly
traditional insurance policies are kept as security. The surrender value is considered while giving an
overdraft on life insurance policy.
Equity as security:
The stock prices are not stable and because of this volatility in their nature it is considered as risky asset
for an overdraft facility. So the banks give a lower percent when considering the current market price of
Salary as security:
Temporarily the banks offer an overdraft facility against the monthly salary. For instance the monthly
salary of the person is Rupees 1 lakh then the person is eligible for an overdraft facility of up to Rupees
The processing fee and charges that are applied:
There is not much difference between a loan and an overdraft facility as far as the process of application
is considered. Both of them are granted when you put some of your asset as security with the bank.
Bank might take a longer time to approve the overdraft if you put your house as security, as a property
valuation is needed from a government officer to process the overdraft. As in the case of an overdraft
facility against the bank fixed deposit or life insurance policy, the process of approval is rather quick.
The Banks levy processing fee of 0.5%- 1% with a cap of Rupees 25000 along with the security. This
facility is given for a year after which the bank review the assets put as security.
Points to remember:
There have been situations where people use this facility of overdraft facility to invest the money in
shares and other financial markets.
You can choose the overdraft facility for a short tenure in an urgent situation. The interest has to be paid
regularly to the bank. If you are unable to pay back the loan amount on time then the bank might sell
the assets kept as security with them.
Bank Loans V/S Overdraft Facility
Overdraft Facility Bank Loans
Pros They are flexible and the
borrowed amount can be
changed within the limit.
Large amount of loan can be
Interest has to be paid on the
borrowed amount only.
Interest rates are lower than
that of overdraft facility.
Cons Can’t be utilized for larger
Not as flexible as an overdraft
The interest rates are higher
than that of bank loans.
The loan has to be paid back in
prescribed time or assets can be
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