What is an Overdraft Facility?

Do you have problems balancing your money? Do you know that some new facility has been developed due to such a problem? The name of one such facility is overdraft. Come let’s know more about it

A bank in Scotland named Royal Bank of Scotland introduced the first overdraft facility in 1728. There was a man from Scotland 'William Hogg' who found it very difficult to manage his money, so he went to the bank and said that before his salary came, he has to pay all his loans. What was then the bankers gave him credit in cash and in this way he became the first person in the world who got an overdraft facility. 

Overdraft Facility – Overview

This is a facility that allows the account holder to withdraw money when there is no money or insufficient money in his account. An overdraft facility is also a type of loan in which you also have to pay interest. Interest in the overdraft facility is calculated daily as the overdraft amount is not repaid as per the set schedule. 

The borrower can repay his amount without any information to the bank. Slowly all the people came to know about this facility and the customers and managers all started using this thing. The overdraft facility got the biggest boost when the industrial revolution started.

As there were small businesses that did not have anything against which they could take loans, they used this facility to grow their business. The bank offers an overdraft facility on any type of account they hold.

Types of Overdraft Facility:

An overdraft facility can be of two types Secured and Unsecured Facilities. Secured are those where you take overdraft over your pledge assets. If the account holder doesn’t pay the outstanding sum, the bank will sell off his asset to recover the loan amount. In the Unsecured type no asset is pledged under the bank, hence it has a lower credit limit. 

Overdraft Against Property- This facility is given against your home, where the sanctioned draft amount is up to 50% of the property amount. Even if you have a home loan still you will be eligible for the overdraft facility. Also, in giving his type of Overdraft your credit history and repayment capacity are checked.

Overdraft Against Fixed Deposit- Property evaluation is time taking. Therefore, overdraft against FD is introduced. In this case, you are eligible for a higher overdraft amount than Overdraft Against Property.

Overdraft Against Salary- In case a person is a salaried employee, he can get an overdraft limit of up to 3-4 times the salary also it varies from bank to bank perspective.

Overdraft Against Equity- Overdraft Facility can be given against the Equity however the overdraft amount is too low as equity depends on the stock market.

Advantages of Overdraft Facility:

• If you have an ongoing bank account, then it is simple and easy to get an overdraft facility
• It can be helpful for businesses that want to maintain working capital
• It is flexible; you borrow only what you need
• Less Paperwork is required than a personal loan
• No assets are required in case of unsecured overdraft

Disadvantages of Overdraft Facility:

• If you extend your overdraft you have to pay more
• The interest rate is charged daily
• It goes through regular revisit by the bank hence the credit limit may be decreased
• If you do not pay back your money your assets will be sold that can have a much higher value
• If you do not follow the terms and condition your facility will be closed

Overdraft Vs Credit Card:

Parameter	Overdraft	Credit Card
Interest Rates	No interest-free period interest will be applicable from day one	It has interest free period
Usages	Used by businesses involved in trading	Used by all individuals
Maintenance	It has no annual fees for maintenance	It has annual fees for maintenance
Offers	It does not provide offers to the customer	It provides cashback offers and discount offers

Lastly, it depends on your requirement whether to avail the facility for overdraft or not. If you do not have many transactions and you have manageable expenses do not go for these facilities. This is for the people in need, don’t enter it for the sake of fashion. Basically, a loan is a loan whether you say it is a personal loan or credit loan you have to pay more in any kind of these.