Understanding Overdraft Facility in Current Account
Disclaimer: Ujjivan Small Finance Bank does not offer Current Account with overdraft facility. This blog is written for the users to understand about overdraft facility.
November 19, 2024
Cash crunch is not uncommon in businesses. Thanks to overdraft facility in current accounts, you can tackle such emergencies without getting into high-interest debt. An overdraft facility in a current account is one of the most convenient financial tools that provides short-term liquidity without the hassle of applying for a loan. In this comprehensive guide, we will explore what an overdraft facility is, its features, benefits, eligibility, charges, and best practices for using it.
What is an Overdraft Facility in a Current Account?
An overdraft facility is a credit arrangement that allows account holders to withdraw more money than they have in their current account, up to a pre-approved limit. It acts as a financial safety net to cover short-term cash flow gaps or unexpected expenses.
The overdraft limit is determined by the bank, based on factors such as the account holder’s creditworthiness, account history, and income.
Features of Overdraft Facility
Flexibility
You can withdraw funds as needed, up to the limit, and repay at your convenience.
Interest on Used Amount
Interest is charged only on the amount used, not the entire overdraft limit.
Short-Term Solution
Ideal for bridging temporary cash flow gaps.
Customisable Limits
Banks set the overdraft limit based on your financial profile and account activity.
No Collateral (For Some Accounts)
Many banks offer unsecured overdraft facilities, especially for salary accounts or accounts with steady income inflows.
Benefits of Overdraft Facility
Quick Access to Funds
No need to wait for loan approvals during financial emergencies.
Cost-Effective
Interest is levied only on the withdrawn amount, making it cheaper than traditional loans.
Convenient Repayment
Repay when funds are available without strict EMIs.
Improves Liquidity
Helps businesses maintain operations during revenue fluctuations.
Better Financial Planning
Supports timely payments, avoiding penalties or missed opportunities.
Types of Overdraft Facilities
Secured Overdraft
Backed by collateral such as fixed deposits (FDs), property, or other financial assets.
Unsecured Overdraft
Does not require collateral but depends on the borrower’s credit score and account history.
Overdraft Against Salary
Offered to salaried individuals with a steady income.
Business Overdraft
Tailored for businesses to manage working capital and operational expenses.
Interest Rates and Charges
Interest rates for overdraft facilities typically range between 10% to 20% p.a. but vary depending on the bank and whether the overdraft is secured or unsecured. Other charges may include:
- Processing Fees
- Renewal Fees
- Late Payment Penalties
Final Thoughts
An overdraft facility in a current account is a versatile financial tool that provides liquidity during emergencies or cash flow shortages. Whether you are an individual or a business, understanding the terms, charges, and responsible usage can help you make the most of this facility.
Consider discussing your needs with your bank to find the most suitable overdraft plan for you. Always remember, while overdrafts offer flexibility, responsible borrowing is key to maintaining financial health.
Ujjivan SFB does not offer overdraft facility on Current Accounts. However, you can still simplify your business transactions with a Current Account from Ujjivan. Open a Current Account with Ujjivan Small Finance Bank and enjoy multiple benefits.
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