Introduction to overdraft
Overdraft is an extension of credit provided to current and savings account holders in cases where the total balance of the account becomes zero or the balance required to fund the purchase is less than the purchase amount. Then the holder still can continue to withdraw money from the account for a short period of time. The overdrawn amount is assigned a limit depending on the customer and the bank, and the relationship they share; the amount ‘overdrawn’ is subject to a fee or an interest rate.
The money extension granted as credit for any account holder older than 18 and younger than 65 will depend greatly on their credit history, credit score and account value. It is a short term credit which the drawee must pay in less than a few months as stipulated by the bank. Overdraft facility is helpful to finance cash flow requirements in the short term for businesses, often acting as short term loans. Often businesses suffer lack of immediate financing when money from their clients take longer to arrive. As such, overdrawn money does not need as much documentation as strategic loans require, making them easier to access. Cheques pose the risk of bouncing, a threat that delays business operations that overdraft prevents. The rate of interest charged varies between various banks, and depends on the credibility and relationship between the user and the bank. The upper limit is decided by the bank as is the duration by when the repayment must be made. In order to avail an overdraft loan, the user must have a bank account with the respective bank.
Highlights of Overdraft
The interest charged on an overdraft loan amount is charged only on the amount utilized. In bank loans, regardless of what amount is spent from the principal availed, interest is paid on the entire amount. Interest rates for overdraft loans are higher than usual rates. Some varieties of overdraft limits are assessed against salary accounts, time deposits, savings and current accounts.