What is Bank Overdraft? What are its Advantages

Financial emergencies can take place unexpectedly. In such times a person can either use their credit card or apply for a small personal loan. However, there is another option which is more flexible and convenient- bank overdraft.

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Bank overdraft service allows a person to withdraw funds from their account in excess of the current balance, although as per the limit. So, if a person has Rs. 5 lakhs in their bank account and they are eligible for bank overdraft facility with a limit of Rs. 1 lakh, then they can withdraw as much as Rs. 6 lakhs at any given time.

A person availing bank overdraft service has to pay an interest rate on the withdrawn overdraft amount. Generally, lenders also require the users to offer collateral for security reasons.

The following are some of the biggest advantages of bank overdraft facility:

Convenience

Bank overdrafts are super convenient and simple. For small financing needs, you can avoid the paperwork and other formalities of personal loans and withdraw the required amount directly from your bank account. You don’t even need an approval from the lender.

Interest Rate Benefits

As soon as you withdraw funds using overdraft facility the interest rate meter starts ticking. However, as soon as you pay the interest amount and the principal amount (the amount withdrawn in excess) the meter stops. However, in personal loans and credit cards, you have to pay a fixed amount over a fixed period.

Instant Payments

Funds are reimbursed almost immediately in overdraft service, usually in 24-48 hours.

Bank overdraft has its advantages. However, there are risks too. For instance, failing to repay the overdraft loan can lead to the seizure of collateral. The interest rates applicable can also be quite high in some cases.