Imagine running low on funds just before a big payment is due. Unexpected expenses have drained your account, and payday is still days away. You need immediate access to extra money without the hassle of a loan application. This is exactly where a personal loan overdraft facility comes to the rescue, offering a quick and flexible solution. In this article, we’ll explore what a personal overdraft facility is and how it can help manage your finances in such situations.
What is a Personal Loan Overdraft Facility?
A personal loan overdraft facility is a service offered by financial institutions that allows you to withdraw money from your loan account up to a certain limit sanctioned by the bank. It's similar to a traditional personal loan, but with more flexibility in terms of usage and repayment.
When you opt for an overdraft facility, you can withdraw more money than what is available in your loan account. So, if you have ₹1 lakh in your account but have an overdraft limit of ₹50,000, you can withdraw up to ₹1.5 lakhs.
The financial institution treats the overdrawn amount as a short-term credit. You must pay interest only on the amount you have overdrawn and not the entire sanctioned limit.
How Does a Personal Loan Overdraft Facility Work?
A personal loan overdraft (OD) facility is similar to a regular overdraft facility linked to your savings/current account.
The key difference is that the overdraft limit sanctioned with a personal loan OD is higher than regular OD facilities. Generally, you can get a personal loan overdraft for up to 7-10 times your monthly income.
Here is how it works:
- You apply for a personal loan overdraft facility from your bank up to a certain amount based on eligibility. This is the maximum you can overdraw.
- You can now withdraw up to the sanctioned OD limit over and above the balance available in your account.
- The amount overdrawn is treated as a personal loan given by the bank.
- You only pay interest on the amount you have actually overdrawn, not on the full OD limit. Some lenders also offer part-payment facility.
Important Features to Know about a Personal Loan Overdraft
Key features of the personal loan overdraft facility are:
1. Tenure
A personal loan overdraft facility is usually offered for 1 to 5 years. Some financial institutions also provide overdrafts for shorter periods. Please note that an overdraft facility for a shorter period is usually offered as an extension after the end of the tenure of the original overdraft.
2. Repayment
Most financial institutions require interest payments each month. You can pay the principal as funds become available. The best part is that there are no fixed EMIs. You can manage your repayment requirements along with other expenses.
3. Interest Rate
The interest rates on personal loan overdrafts apply only to the amount you withdraw, not your entire overdraft amount. Please note that the interest rates on overdrafts are usually higher than normal loans.
4. Credit Limit
You can only withdraw up to the approved credit limit with a personal overdraft facility. This withdrawal ceiling is decided based on your credit record, income levels, and expenditure patterns.
5. Prepayment Charges
Unlike regular loans, personal loan overdrafts do not have a fixed EMI repayment structure. You can flexibly repay the borrowed principal amount when funds become available. However, if you wish to prepay the entire loan amount, lending institutions may apply foreclosure charges based on the terms and conditions of the loan agreement.
Eligibility Criteria
The eligibility norms for personal loan overdraft facilities are similar to those for standard personal loans. These parameters can help you determine your eligibility, and the overdraft limit you can qualify for. The most important eligibility criteria are:
- You must be an Indian resident.
- Your age should typically be between 21 and 65 years of age.
- The overdraft facility is usually available to salaried individuals, doctors, self-employed professionals/non-professionals, and central/state/local government employees.
- Those with credit scores of 750* and higher usually qualify for lower interest rates.
Final Words
A personal loan overdraft facility gives you a flexible way to meet your urgent short-term money needs without the strict repayment rules. Whenever there is a requirement for extra cash, it lets you withdraw more funds than your actual account balance. So, it acts as an always-available backup source of financing when you need to make payments or pay urgent bills but run short on cash.
