What is Overdraft Loan – Key Features & Benefits
In the dynamic world of finance, managing short-term cash needs is crucial—whether you’re an individual facing an unexpected bill or a business dealing with temporary fund shortages. Among various lending options available today, one financial tool stands out for its flexibility and instant liquidity: the Overdraft Loan, also known as an Overdraft Facility.
Simply put, an overdraft loan is a credit line provided by a bank that allows you to withdraw more money than your current account balance. The bank determines a limit based on your financial profile, and you are charged interest only on the amount you utilize, not on the entire sanctioned limit. This makes overdraft loans highly convenient for urgent, short-term financial requirements.
What is an Overdraft Loan?
An Overdraft Loan is a revolving credit facility linked to the bank account that allows you to withdraw extra funds beyond your available balance, up to a sanctioned limit. You pay interest only on the utilized amount, and repayment is flexible without EMI obligations.
This option acts as a financial safety net, helping you manage sudden expenses without disrupting your cash flow or liquidating investments.
How Does an Overdraft Loan Work?
Let’s understand with a real example:
You have ₹1,000 in your bank account and an overdraft limit of ₹500.
If you withdraw ₹1,200, your balance becomes –₹200, meaning you’ve used ₹200 from the overdraft facility.
You will be charged interest only on ₹200 for the period it remains unpaid, not ₹500.
You can repay this amount anytime by depositing funds back into your account. Once repaid, the credit limit resets, and you can use it again—similar to a revolving line of credit.
Types of Overdraft Loans
Banks offer various overdraft facilities depending on the borrower type and security offered:
1. Secured Overdraft
Backed by collateral such as:
- Fixed Deposits (FD Overdraft)
- Mutual Funds & Shares
- Property / Home equity
- Insurance Policies
Interest rates are usually lower compared to personal loans.
2. Unsecured Overdraft
Provided without collateral, mostly based on salary income or business revenue.
Interest rates are comparatively higher, but the convenience is unmatched.
3. Overdraft for Salary Account Holders
Employees with salary accounts can avail instant OD up to a pre-approved limit.
4. Business Overdraft / Cash Credit
Ideal for working capital, inventory purchase, invoice payouts, and operational expenses.
Key Features of Overdraft Loan
1. Flexible Credit Limit
The bank sanctions a specific overdraft limit depending on:
- Credit score
- Banking history
- Income profile
- Company/business turnover
- Collateral availability
2. Interest Only on Utilized Amount
Unlike term loans, where EMI applies to the entire amount, interest in an overdraft is calculated only on the borrowed portion.
3. No Fixed Tenure
There is no rigid repayment schedule or fixed loan duration. You can repay anytime and reuse the limit.
4. Instant Access to Funds
Withdraw instantly via:
- Debit card
- Cheque
- Net banking
- Mobile banking
- UPI (in most banks)
5. Revolving Credit
Once you repay, the limit gets restored—making it reusable whenever needed.
Benefits of an Overdraft Loan
The overdraft facility is a powerful financial tool offering unique advantages:
1) Emergency Money Anytime
Useful during urgent situations like:
- Medical bills
- Car repair
- House maintenance
- Sudden travel expense
2) Helps Manage Cash Flow
Businesses can use OD to manage:
- Working capital gaps
- Vendor payments
- Short-term operational costs
Interest Savings
Interest is charged only on what you use, not the entire sanctioned amount.
Minimal Documentation
Most banks allow quick sanctioning, especially for pre-approved customers.
No Foreclosure Charges
You can repay partially or fully without penalty.
Better Than Credit Card For Large Funds
Overdraft limits are often higher with lower interest rates than credit cards.
When Should You Use an Overdraft Facility?
An overdraft loan is ideal when:
| Situation | Why Overdraft Works |
| Unplanned expenses | Provides instant liquidity without loan application delays |
| Cash flow issues | Helps businesses maintain working capital smoothly |
| Seasonal revenue dips | Acts as a backup fund during low sales months |
| Opportunity investment | Allows quick access to funds for investment or inventory purchase |
| Avoiding late penalties | Better than paying cheque bounce or overdraft fees |
Overdraft Loan vs Personal Loan – Which is Better?
| Feature | Overdraft Loan | Personal Loan |
| Interest Charged On | Utilized Amount Only | Entire Loan Amount |
| Repayment Type | Flexible (No EMI) | Fixed EMIs |
| Ideal For | Short-term needs | Planned medium-long term borrowing |
| Tenure | No fixed tenure | Fixed tenure |
| Processing Time | Instant for pre-approved | Usually longer |
If you need money occasionally or unpredictably, an overdraft is better. If you need one-time big funds with fixed repayment, a personal loan suits you more.
Eligibility Criteria for Overdraft Loan
Eligibility may vary by bank, but generally:
- Minimum age 21 years
- Stable salary or business income
- Good credit score (650+ recommended)
- Active bank account with transaction history
- Collateral required for secured OD
Documents Required
For individuals:
- PAN & Aadhaar
- Bank Statement (6–12 months)
- Salary slips/ITR
- Address proof
For businesses:
- GST Certificate
- Financial Statements
- Business Registration Proof
- Bank Statement (12 months+)
Charges & Interest Rates
Interest rates vary by bank and loan type.
Typical range:
10% – 18% p.a. for salary/business overdraft
6% – 10% p.a. for secured overdraft against FD/Mutual Funds
Other possible charges:
- Processing Fee
- Renewal Fee (annual)
- Over-limit charges (if limit exceeded)
Frequently Asked Questions (FAQs)
1. Is overdraft good or bad?
An overdraft can be both good and bad depending on how you use it. It’s good when used responsibly for short-term cash needs, managing emergencies, or handling temporary cash flow gaps because interest is charged only on the amount utilized.
2. Can I withdraw cash using overdraft?
Yes. You can withdraw money through ATM debit card, cheque, UPI, net banking, or mobile banking as long as you stay within the approved limit.
3. What happens if I don’t repay my overdraft?
Interest continues to accumulate on the outstanding amount. The bank can also recover funds directly from your savings/current account and may reduce or revoke the facility.
4. Is overdraft a loan or a credit line?
It is a revolving credit line linked to your bank account, functioning like a flexible loan available on demand.
5. Is overdraft better than a credit card?
For higher amounts and business needs, overdraft is more suitable with lower interest rates compared to credit cards.
Conclusion
An Overdraft Loan is one of the most flexible credit tools available for meeting short-term financial needs, managing cash flow, and handling emergencies without liquidating investments or applying for a new loan every time.
With interest charged only on the amount utilized and no EMI pressure, it becomes ideal for both individuals and businesses looking for financial freedom and convenience. If you regularly face fluctuating expenses or business cash gaps, an overdraft facility can be a smart addition to your financial strategy.