Profile
Settings
Refer your friends
Sign out
Bank overdraft is very useful when a customer has constant debit transactions on any given day and has insufficient balance in the account. Customers who have money shortages in the bank account can continue cash outflow with a bank overdraft. It is a form of credit given to customers when they have a low or zero balance. Banks offer this facility to customers who do not have enough money in the present but can pay later.
Who Issues Bank Overdraft?
A bank overdraft is issued by a bank when a customer has a low or zero balance. Customers can utilize this facility against fixed deposits, salary accounts, shares and bonds, and properties like houses. Banks charge interest on the actual amount borrowed by the customer. There are two types of bank overdrafts.
Secured Overdraft
It is an overdraft that one can borrow against collateral like deposits, houses, or equities.
Unsecured Overdraft
Borrowing without providing any security is called an unsecured overdraft. Banks will offer an overdraft depending on the financial situation of the borrower. The bank will verify whether the customer has any history of loan non-repayment or whether s/he owns properties, businesses, and other assets.
Difference Between Intraday Overdraft and End-of-Day Overdraft
Features of Bank Overdraft
The credit limit depends on the customer’s ability to pay it back. Therefore, the amount of credit offered is based on the customer’s financial history and the present capacity to repay.
A Credit is availed when money is needed. Customers can borrow money from the bank whenever their account balance drops. A customer can take credit with zero balance in the account.
Interest is paid according to the use of credit. A customer has to pay only when they have the credit money. It can be a year, a month, or even a day.
Pre-payments on an overdraft are not allowed. There are no pre-charges for bank overdrafts, meaning the customer does not need to pay any money to obtain an overdraft. The customer repays the overdraft along with the interest charged by the bank.
Repayment occurs when the customer has sufficient money. The customer can pay according to the current financial situation. S/he can pay a small amount at one time and the rest later when they have sufficient funds. Repayment does not occur in instalments.
Advantages of Bank Overdraft
Bank overdrafts are flexible
Customers can avail themselves of overdrafts according to requirements. Therefore, it allows the customer to be financially stable and maintain cash flow.
Fast approval
Overdrafts take less time to get approved and are easier to arrange than conventional loans.
Saves the customer from embarrassment
When the customer does not have enough funds in their account, the cheques might bounce. Overdrafts are a better way of preventing such situations. It is a boon to small businesses.
Disadvantages Of Bank Overdraft
Bank overdraws are expensive
The bank charges interests and fees to prevent customers from depending on bank overdrafts. The interest charged is often higher than that of loans.
The banks can retract bank overdraft
The bank can take back the approved credit. It happens when the customer has not paid back previous credits. Breach of terms and conditions can also lead to this situation.
There is a risk on security assets
When the customer cannot repay the credit, their assets are at risk of being taken up by the bank.
Difference Between Bank Overdraft and Loan
Measures to Prevent Bank Overdrafts
Bank overdrafts are risky because of the chances of losing the secured assets due to non-repayment of credit. In addition, the rate of interest is also high. Therefore, a few measures to prevent bank overdrafts are as follows:
Keep track of account balance regularly. It would prevent the customer from taking unnecessary. Mobile and net banking facilities are the best modes to track account activities.
Keep a check on bank letters. The banks often inform the customer much before a credit requirement situation. For example, they send notices and bank details to the customer’s email every month.
Maintain sufficient account balance to avoid situations of overdraft. Keep more money than required to prevent these situations.
Conclusion
Bank overdraft is very useful for small business owners and entrepreneurs. Bank issues an overdraft with or without collateral. Bank overdraft is a flexible arrangement, but it is expensive compared to loans. Overdraft is different from other credit options. Students can compare overdraft with the loan and cash credit to understand bank credits in detail.
