Overdraft Loan: OD Interest Rate, Features, Types & Benefits

In today’s fast-paced financial world, liquidity and cash flow management are crucial for both individuals and businesses. An Overdraft Loan is one of the most flexible credit facilities offered by banks and financial institutions. Unlike a personal or business loan with a fixed tenure, an overdraft facility allows you to withdraw funds beyond the balance in your account up to a sanctioned limit. You pay interest only on the utilized amount and for the duration it is used, making it an efficient way to manage short-term financial needs.

This blog will cover everything you need to know about overdraft accounts, including OD interest rate, features, types, benefits, eligibility, and calculators to estimate your costs. We will also share common mistakes to avoid and provide links to trusted resources for better understanding.

What is an Overdraft Loan?

An overdraft loan is a credit facility linked to your current or savings account, allowing you to withdraw more than your available balance. It functions as a short-term loan where the sanctioned limit depends on your income, assets, or business turnover. This facility helps in managing working capital, personal expenses, or unforeseen emergencies.

For businesses, it acts as a cushion to handle cash flow gaps, while for individuals, it can be useful during medical emergencies, education expenses, or large purchases.

👉 Learn more about overdraft loans directly from CreditCares.

Key Features of Overdraft Accounts

1. Flexibility: Withdraw only what you need, when you need it.
2. Interest Only on Utilized Amount: Unlike personal loans, OD interest is charged only on the outstanding balance.
3. No Fixed EMI: Repay as per convenience within the limit.
4. Renewable Facility: Overdraft limits are typically reviewed and renewed annually.
5. Linked to Assets: Limits may be secured against fixed deposits, property, or other collateral.
6. Business Support: Ideal for managing working capital needs.

OD Interest Rate – How It Works

The OD interest rate varies by bank, customer profile, collateral, and repayment history. On average, overdraft interest rates range between 9% to 18% per annum for secured overdrafts. For unsecured overdrafts, the rate may be higher.

Unlike standard loans, overdraft interest is calculated daily on the utilized amount and debited monthly. For instance:

• Sanctioned OD Limit: ₹10,00,000
• Amount Utilized: ₹4,00,000
• Interest Rate: 12% p.a.
• Duration: 30 days

Interest Payable = (4,00,000 × 12% × 30) ÷ 365 = ₹3,945 approx.

👉 To understand repayment better, try using an Overdraft Loan Calculator.

Types of Overdraft Loans

1. Secured Overdraft
   • Linked to assets like FDs, property, or securities.
   • Lower interest rates.
   • Higher sanction limits.
2. Unsecured Overdraft
   • Based on creditworthiness and income.
   • Higher OD interest rates.
   • Usually offered to salaried individuals and businesses with good banking history.
3. Overdraft Against Salary
   • Facility linked to salary accounts.
   • Popular with professionals for emergency needs.
4. Business Overdraft
   • Helps SMEs manage working capital.
   • Repayment linked to cash inflows.
5. Overdraft Against Property (Loan Against Property OD)
   • High-value overdraft secured against residential or commercial property.
   • Ideal for business expansion or large personal expenses.

Benefits of an Overdraft Loan

• Pay Interest Only on Usage – Saves cost compared to fixed EMIs.
• Quick Access to Funds – Withdraw instantly when required.
• Flexible Repayment – No mandatory monthly installments.
• Improves Liquidity – Perfect for managing cash flow fluctuations.
• Emergency Preparedness – Acts as a financial safety net.

For businesses, overdrafts provide a continuous flow of working capital. For individuals, it ensures timely access to funds without long loan approval processes.

Overdraft Loan Eligibility

Eligibility for overdraft loans depends on:

1. For Individuals:
   • Age: 21–60 years
   • Stable income (salaried or self-employed)
   • Good credit history (CIBIL score above 700 preferred)
   • Existing relationship with the bank
2. For Businesses:
   • Minimum operational history (usually 2–3 years)
   • Healthy cash flow statements
   • Valid business registrations and licenses
   • Collateral (if applying for a secured overdraft)

👉 Explore in detail: Overdraft Loan Eligibility for Business.

How to Apply for an Overdraft Loan

1. Check Eligibility – Use an overdraft loan calculator or consult your bank.
2. Choose Secured or Unsecured Facility – Depending on your assets.
3. Submit Application – Online or offline with required documents.
4. Approval & Sanction – Bank reviews financial history and CIBIL score.
5. Access Funds – Withdraw from your account as per requirement.

Common Mistakes to Avoid

Many borrowers make errors when applying for overdrafts. Avoid these pitfalls:

• Overestimating your repayment capacity.
• Ignoring the terms and hidden charges.
• Frequent overdraft utilization that affects credit score.
• Not maintaining the required minimum balance.

👉 Read more in detail: 10 Common Mistakes to Avoid When Applying for an Overdraft Loan in India.

Documents Required for Overdraft Loan

For Individuals:

• PAN, Aadhaar, and ID proof
• Salary slips (last 3–6 months)
• Bank statements (last 6–12 months)

For Businesses:

• Business registration documents
• GST returns and financial statements
• Bank statements and income tax returns
• Collateral documents (for secured OD)

Overdraft Loan Calculator – Estimate Your Costs

An overdraft loan calculator helps in estimating interest payable on the utilized amount. By inputting:

• Sanctioned limit
• Amount used
• Interest rate
• Duration

You can get an exact estimate of repayment. This helps in financial planning and ensures you use the overdraft facility wisely.

👉 Try our Overdraft Loan Calculator on CreditCares.

Pros and Cons of Overdraft Loan

Pros:

• Flexible usage
• Lower cost if used wisely
• Quick access to funds

Cons:

• High interest if misused
• Over-dependence may hurt credit profile
• Requires discipline in repayments

Conclusion

An overdraft loan is an excellent financial tool if used responsibly. It provides instant liquidity, flexibility, and relief during cash crunches. However, borrowers must be aware of the OD interest rate, terms, and eligibility requirements before applying. Businesses, in particular, can benefit immensely by managing working capital efficiently through overdrafts.

Whether you are an individual or a business owner, understanding overdraft features and planning usage through a calculator ensures smarter financial decisions.

👉 Start exploring overdraft options and avoid common mistakes with CreditCares.

Overdraft Loan FAQs

1. What is an Overdraft Loan?
   An overdraft loan is a credit facility linked to your current or savings account, allowing you to withdraw more than your available balance up to a sanctioned limit. Interest is charged only on the utilized amount.
2. How does OD interest rate work?
   OD interest rates vary by bank, customer profile, collateral, and repayment history. It is calculated daily on the utilized amount and debited monthly.
3. What are the types of overdraft loans?

• Secured Overdraft
• Unsecured Overdraft
• Overdraft Against Salary
• Business Overdraft
• Overdraft Against Property (Loan Against Property OD)

4. What are the key features of an overdraft account?

• Flexibility in withdrawal
• Interest only on utilized amount
• No fixed EMI
• Renewable facility
• Linked to assets (if secured)
• Supports business cash flow

5. What are the benefits of an overdraft loan?

• Save interest by paying only on usage
• Quick access to funds
• Flexible repayment options
• Improves liquidity
• Acts as a financial safety net

6. Who is eligible for an overdraft loan?
   Individuals: Age 21–60, stable income, good credit history, existing bank relationship.
   Businesses: Minimum operational history 2–3 years, healthy cash flow, valid registrations, collateral for secured OD.
7. How can I apply for an overdraft loan?
   Check eligibility, choose secured or unsecured facility, submit application with required documents, get approval & sanction, then access funds.
8. What common mistakes should be avoided when applying?

• Overestimating repayment capacity
• Ignoring terms and hidden charges
• Frequent utilization affecting credit score
• Not maintaining minimum balance

9. What documents are required for overdraft loans?
   Individuals: PAN, Aadhaar, ID proof, salary slips, bank statements.
   Businesses: Registration documents, GST returns, financial statements, bank statements, collateral documents (if secured).
10. Is there a tool to estimate overdraft loan interest?
    Yes, an overdraft loan calculator can estimate interest payable based on sanctioned limit, amount used, interest rate, and duration.
11. What are the pros and cons of an overdraft loan?
    Pros: Flexible usage, lower cost if used wisely, quick access.
    Cons: High interest if misused, over-dependence may hurt credit profile, requires discipline in repayments.
12. Where can I learn more about overdraft loans and avoid mistakes?
    You can explore more with CreditCares Overdraft and 10 Common Mistakes to Avoid When Applying for an Overdraft Loan in India.