Both businesses and individual borrow money from time to time. We all look for ways to borrow money to help us get through financial difficulties. It might not seem sensible to obtain a loan from a bank when you need money right away and interest rates on loans are rising. This is when your current account with overdraft facility is useful.
An overdraft facility is good for businesses that often have gaps in their cash flow but can pay back the money they borrow in a short amount of time. Understand how this facility works right away:
What Does A Current Account With An Overdraft Facility Mean?
Holders of current accounts are able to withdraw funds through the overdraft facility even when there is no money in their accounts. Using the current account with overdraft facility is comparable to getting a short-term loan from your bank in many ways. As a result, the sum borrowed through the overdraft facility is subject to interest.
The overdraft limit, which the bank sets for each current account, may differ dramatically between two account holders. Furthermore, a current account with overdraft facility is more flexible than a loan because account holders may repay the amount whenever it is feasible, in part or in full, as opposed to loans, where borrowers must pay back the amount in EMIs over a set period of time.
What Kinds of Overdraft Facilities Are There?
Understanding what overdraft is required knowledge of the various types of overdraft facilities. There are two sorts of current accounts with an overdraft facility: secured and unsecured.
- Facility for Secured Overdraft: A current account with overdraft is when you borrow money from your bank in exchange for a pledge of anything of value. Most Indian banks let people with current accounts use their equity, fixed deposits (FDs), insurance policies, and property as collateral for an overdraft. The bank keeps the original paperwork for the collateral until the account holder pays back the loaned amount.
- Facility for Unsecured Overdrafts: There is no requirement for collateral for the unsecured overdraft facility in a current account. The bank sets an Overdraft Limit for current account customers based on a number of variables. The account holders may use the Overdraft Facility to borrow funds up to the pre-approved limit if they require immediate access to more money.
Characteristics of Current Account with Overdraft Facilities
There are limits on how much you can go overdrawn when you open a current account with overdraft feature. This cap may differ for every application.
- Interest will be added to the amount of the allowed overdraft that was used. Every day it is calculated, and at the end of each month, it is charged to the account. The interest will be charged to the principal amount if you don't pay it according to the timetable. After that, the interest will be assessed or calculated using the revised principal.
- You don't have to pay any fees when you repay the money you borrowed through current accounts with an overdraft facility.
- If you have a current account with overdraft facility for business, there is no minimum repayment amount required as long as the amount you owe stays within the allowed limit. An overdraft that is not immediately repaid may lower your credit score.
- The majority of institutions also provide an option to get overdrawn jointly. You can do this to jointly take out an overdraft, in which case you'll both be liable for paying back the money you borrow. Additionally, it means that the other of you will be responsible for paying the whole amount if one of you is unable to repay the amount taken from the allowed overdraft limit. No of how much overdraft any borrower has, their collateral will be in danger if they default on their loans.
- The current accounts with an overdraft facility and its use are completely at the authority of the lender, who also determines the overdraft repayment period.
How To Apply For A Current Account With Overdraft Facility
Some bank account holders already have pre-approval for an overdraft facility for businesses, just like they do for loans and credit cards. If you fall into this category, taking out more money than you have in your bank account will cause your balance to drop, which will cause the overdraft facility to turn on automatically.
You can speak with your bank about those who haven't been pre-approved. The majority of banks now offer an efficient online application process with immediate sanctions. There are different application forms for different types of collateral; thoroughly read the form and fill in the details properly.
Which Bank To Choose For Current Accounts With An Overdraft Facility
No one is behind! These days, all banks and other service providers are trying their best to provide the best services to their customers. Usually, private service providers have high-interest rates, and the risk factor is high. However, the banks backed by the RBI do not just have a minimum interest rate; they are trustworthy too. Choose HDFC Bank for their SmartHub vyapar benefits. Getting current accounts with an overdraft facility is just a request-based process. Upon checking the value of your account, this service is easily provided to business owners.