Overdraft Facility – Features, Process to Apply & How it Works

Managing cash flow is one of the most important aspects of running a business or handling personal finances. At times, unexpected expenses or temporary shortages can disrupt financial stability. That’s where an overdraft facility comes into play. It allows individuals and businesses to withdraw more money than they actually have in their accounts, offering flexibility and financial cushioning when it’s most needed.

In this blog, we’ll cover everything about overdraft options, including features, benefits, eligibility, documents required, types, the process to apply, how it works, and how you can apply through CreditCares. We’ll also explain specific forms such as overdraft against property, overdraft against fixed deposit, overdraft against insurance policy, overdraft against salary, and overdraft against equity shares or mutual funds.

What is an Overdraft Facility?

An Overdraft Facility is a credit arrangement offered by banks that allows account holders to withdraw funds beyond the balance available in their account. Unlike a regular loan, the overdraft facility provides a revolving line of credit where interest is charged only on the utilized amount and for the period it remains outstanding.

For example, if you have an overdraft limit of ₹5,00,000 and you withdraw ₹2,00,000, you’ll only pay interest on the ₹2,00,000 you use, not the full limit.

For an official explanation, you can check the Reserve Bank of India’s guidelines on credit facilities.

Key Features of Overdraft Facility

1. Revolving Credit – Borrow, repay, and borrow again within the sanctioned limit.
2. Interest on Usage – Interest is charged only on the utilized amount, not on the sanctioned limit.
3. Flexible Repayment – Repayment schedules are flexible compared to fixed EMI loans.
4. Short-term Financing – Ideal for managing working capital or meeting sudden personal expenses.
5. Variety of Security Options – Overdrafts can be secured against property, fixed deposits, or even salary accounts.

Benefits of Overdraft Facility

• Cash Flow Management – Helps businesses and individuals manage liquidity during financial crunches.
• Quick Access – Easy to withdraw funds without reapplying for loans.
• No Prepayment Penalties – Repay anytime without penalties.
• Cost-effective – Pay interest only on the used amount.
• Versatile – Can be availed against different collateral types.

For additional insights, you can read Investopedia’s explanation of overdrafts.

Types of Overdraft Facilities

Overdraft facilities are categorized based on the security or collateral offered. Let’s look at each type:

1. Overdraft Against Property

This facility is offered when you pledge your residential or commercial property as collateral. Banks provide a credit limit based on the property’s value.

• Ideal for business owners needing working capital.
• Lower interest rates compared to unsecured overdrafts.

2. Overdraft Against Fixed Deposit

Banks allow customers to avail overdrafts against their fixed deposits.

• Interest rates are generally 1-2% higher than the FD interest rate.
• FD continues to earn interest while the overdraft is active.

3. Overdraft Against Insurance Policy

If you hold a life insurance policy with a surrender value, banks may offer overdrafts against it.

• Loan value depends on the surrender value.
• A good option if you don’t want to liquidate the policy.

4. Overdraft Against Salary

Some banks provide overdrafts to salaried employees based on their monthly income.

• Credit limit is usually 2-3 times the monthly salary.
• Useful for meeting unexpected personal expenses.

5. Overdraft Against Equity Shares or Mutual Funds

Banks may sanction overdrafts against shares or mutual fund units.

• The limit is based on the market value of the securities.
• Market volatility can impact the available limit.

Eligibility for Overdraft Facility

Eligibility depends on factors such as:

• Account history and creditworthiness.
• Type of collateral (property, FD, salary, etc.).
• Income stability for individuals.
• Business financial statements and CIBIL Rank for MSMEs.

For more on business credit health, you can explore CreditCares’ CIBIL Rank services.

Documents Required for Overdraft Facility

To apply for an overdraft, you will generally need to provide:

• Identity Proof – Aadhaar, Passport, PAN Card, or Voter ID.
• Address Proof – Utility bills, Aadhaar, Passport, or Ration Card.
• Income Proof – Salary slips, ITR, or business financial statements.
• Collateral Documents – Property papers, FD receipts, insurance policy details, or share/mutual fund statements.
• Bank Account Statements – Typically for the last 6–12 months.
• Photographs – Recent passport-size photographs.

These may vary from bank to bank, but having complete documentation ensures faster processing.

Process to Apply for Overdraft Facility

1. Check Eligibility – Review bank requirements.
2. Choose Collateral – Decide if you’re pledging property, FD, insurance, or shares.
3. Submit Application – Fill the overdraft request form at the bank.
4. Document Verification – Submit ID proof, income proof, and collateral documents.
5. Sanction and Limit Fixation – Bank evaluates and fixes the overdraft limit.
6. Activation – Once approved, the overdraft limit is activated in your account.

Most banks offer online overdraft application through internet banking as well.

How to Apply for Overdraft with CreditCares

Applying with CreditCares simplifies the process significantly. As a trusted loan consultant, CreditCares provides expert guidance and faster processing.

Steps to apply with CreditCares:

1. Visit the official CreditCares Overdraft page.
2. Choose the type of overdraft that suits your needs (property, FD, insurance, salary, or securities).
3. Submit your details and documents online through the CreditCares platform.
4. CreditCares experts will connect you with top lenders to get the best overdraft limit and interest rates.
5. Get end-to-end support until the overdraft limit is sanctioned.

This not only saves time but also ensures you secure the best deal available in the market.

How Does an Overdraft Facility Work?

• You can withdraw funds up to the sanctioned limit anytime.
• Interest accrues only on the withdrawn amount.
• Repayment can be made flexibly by depositing funds back into the account.
• Credit limit replenishes as repayments are made.

Example: If your overdraft limit is ₹3,00,000 and you use ₹1,00,000 for 20 days at 12% interest p.a., your interest will be only around ₹657 for that period.

Overdraft Facility vs Personal Loan

Risks of Overdraft Facility

While overdrafts are convenient, there are some risks:

• High Interest Rates – Unsecured overdrafts can have higher interest compared to secured ones.
• Over-dependence – Frequent reliance may harm financial discipline.
• Collateral Risk – In secured overdrafts, collateral may be seized if repayments fail.

Tips to Manage Overdraft Facility Wisely

• Use only when necessary.
• Repay as soon as possible to reduce interest costs.
• Keep track of utilization to avoid over-borrowing.
• Review terms regularly with your bank.

Conclusion

An Overdraft Facility is a flexible and powerful financial tool that provides a buffer during financial shortages. Whether it’s overdraft against property, overdraft against fixed deposit, overdraft against insurance policy, overdraft against salary, or overdraft against equity shares or mutual funds, choosing the right type can help manage both personal and business finances efficiently.

For businesses especially, maintaining a healthy CIBIL Rank and credit report ensures better access to overdraft facilities and other credit lines. To explore credit solutions for your business or apply for an overdraft, visit CreditCares.

FAQs on Overdraft Facility

1. What is the maximum limit for an overdraft facility?

It depends on the type of collateral and the bank’s policies. Limits can range from a few lakhs to several crores.

2. Is overdraft facility good for businesses?

Yes, it helps businesses manage working capital and cash flow issues effectively.

3. Can I get an overdraft facility without collateral?

Yes, some banks provide unsecured overdrafts, especially to salaried individuals with good credit scores.

4. How is overdraft interest calculated?

Interest is calculated daily on the amount utilized and charged monthly.

5. Does overdraft affect CIBIL score?

Yes, timely repayment improves your credit history, while defaults can negatively affect your CIBIL score.