What is Overdraft Account ? What are the benefits and disadvantages of Overdraft?

Overdraft Account is an account in which you can withdraw more than the amount lying in the account. This is a kind of loan account. However, it can also be called a Current account, in this you can do any number of transactions everyday. The biggest special thing about this account is that you will have to pay interest only on the outstanding amount i.e only the amount taken on the loan.

This is how Overdraft is available?

Almost all the government and private banks offer overdraft facilities, in which some provide this facility on current account, salary account and FD. However, some financial institutions offer Overdraft facilities in lieu of shares, bonds and insurance policies. Along with this, some banks also offer their customers the facility of Overdraft after seeing the credibility of their customers. In this facility, taking a loan and repaying it is very easy.

You can withdraw so much money from Overdraft Account?

Banks already decide the limit for withdrawing money from overdraft account. However, the limit set by the bank depends on what you have mortgaged in the bank and its value. Banks, in overdraft cases, have higher limits on withdrawal on Salary Account and FD. For example, if you have FD of Rs 2 lakh in the bank, then under overdraft you can set a limit to withdraw rupees 1.60 lakh from the bank. However in case of shares and debentures, the withdrawal limit under overdraft can range from 40 to 70 percent.

 Rate of Interest charged on Overdraft?

Under the overdraft account, the bank will charge interest on the amount withdrawn for the same period of time for which the money has been withdrawn. Generally bank charge one to two percent interest on the amount withdrawn under overdraft.

Benefits of Overdraft:-

• Suitable for Short-term lending needs.
• There is usually no charge to clean the overdraft earlier than expected.
• Interest is paid only on Overdrawn balance.
• Interest and arrangement fees are generally tax deductible.
• Due to its short-term nature, the balance of overdrafts is not normally included in the calculation of the business's financial gearing.

Disadvantages of Overdraft:-

• Charged Interest is not predictable, as it depends on a variable interest rate and a higher amount on each day of the charge period.
• The Lender can not give the full amount requested, as the financial condition of the business will be taken into consideration.
• Overdrafts are repayable on demand, although this is unlikely until the business enters financial difficulties.