Overdraft is a credit facility that provides by the bank to his account holders. This credit facility allows account holders to withdraw more than their balance in accounts. Overdraft facility can be availed by salary, savings, current and cash credit account holders.
Basically, overdraft facility can be secured as well as unsecured. In case of secured overdraft facility, account holders need to provide collateral such as salary, fixed deposit, life insurance policies or equity instruments. On the other hand no such collateral is required for unsecured overdraft.
On the basis of overdraft limit overdraft facility is divided into two categories one is authorized and another is unauthorized. In the authorized version there is an arrangement between bank and account holders regarding overdraft limit but no such arrangement is taken place in case of unauthorized version. Sometimes, account holders use unauthorized overdraft facility may exceed credit limit. Credit limit is determined by considering the account balance, credit score and repayment schedule etc of the account holder who wants to avail overdraft facility.
The amount of interest one pay on an overdraft is typically higher than the personal loan. Though the upfront rate may be lower. This is because interest on overdraft is calculated using the average daily balance technique. due to which effective payout increases.
No comments:
Post a Comment