If you’re not hearing this word for the very first time, then there is a chance that you must have got the call from Baja FInance guy with the offer for overdraft limit.

Let’s learn more about the overdraft limit in detail and Bajaj Finance is the only overdraft limit provider in India?

You can understand the ‘Overdraft Limit’ as a financial tool offered by banks and NBFCs in India, which you can use in your condition of financial emergency. Because, I never suggest anyone to use any kind of debt. if it’s not very urgent and necessary.

After all the process, which I’ll explain later in the article, an approved amount is kinda on standby. You can just enter an amount (under or upto approved limit) and in next 5 minutes, the amount will be in your connected account.

Understanding how this facility works and the benefits it offers can help you make informed decisions about managing your finances. In this article, I’ll explain what an overdraft facility on a salary account is, how it works, how to apply for it, which banks or NBFCs are offering this, and the key benefits it provides to account holders.

What is an Overdraft Facility on a Salary Account?

I explained above in simple words but just in case you’re looking for a sophisticated definition: An overdraft facility on a salary account is a credit service offered by banks or NBFCs like Bajaj Finance, that allows account holders to withdraw more money than their current account balance, up to the approved limit. 

This limit will be determined by the banks or NBFCs based on various factors, such as the account holder’s monthly salary, creditworthiness, bank’s internal policies, blah blah blah. (In case you don’t know, banks or NBFCs have all the rights to take any decision without providing any logical or illogical reason/s.)

Now, when you know what is “Overdraft limit” or “OD limit”, let’s jump into another section. What are the keywords which you’ll hear again and again in the process and after.

Keywords of the Overdraft Facility:

• Credit Limit: The approved overdraft amount is predetermined by the banks or partner NBFCs and is usually a multiple of the account holder’s monthly salary.
• Interest Rate: Interest is charged only on the amount utilized, not on the entire overdraft limit (the only benefit of OD limit). The rates are generally lower than those for personal loans or credit cards, but it is very subjective and in some cases you may find the interest rate on the higher side.
• Repayment Terms: The overdraft amount can be repaid flexibly, either in full or in parts, depending on the borrower’s convenience.
• Eligibility: The facility is usually available to individuals with regular salary deposits in their accounts, a good credit history, and a stable relationship with the bank.

Please keep in mind that the overdraft facility is designed to provide short-term financial support to salaried individuals without the need for a separate loan application or the need to provide collateral. 

But at the very same time, everything is like the normal loan and it will impact your credit history with bureau. There are 4 very frequently used bureaus in India, CIBIL, Experian, Equifax and CRIF.

How to get the Overdraft Facility on a Salary Account Work?

It’s time to understand the steps involved in OD limit activation and usage:

• Activation: When you apply for an overdraft facility,(Even when you get the call from some agent and offer you OD limit, and you accept to proceed further, the process will start as you’re applying for it) bank or NBFC partner evaluates your eligibility based on your salary, employment status, credit history, and account balance. 

If approved, they assign a credit limit, which could be a percentage of your monthly salary (e.g., up to 10x your salary). But this is versy subjective and totally depends on the manual process and some individuals.

• Using the Overdraft: When the overdraft facility is processed and approved, you can withdraw money beyond your available account balance, up to the pre-approved limit. 

For example, if your account has a balance of ₹10,000 and your overdraft limit is ₹50,000, you can withdraw up to ₹60,000.

In case, overdraft facility is active for you via any other NBFC not your salary account bank, then you have to apply for money you need from your approved limit, and it will be transferred to your salary account, almost instantly.

• Interest Charges: Interest is charged only on the amount you have utilized, not on the total overdraft limit. 

If you use ₹20,000 from your overdraft limit, interest will be charged only on that amount. Current normal interest rate on your usage of the overdraft limit is ~14.5%. Please be mindful that interest rates may vary from borrower to borrower or provider to provider.

Repayment Mechanism: You can repay the overdraft amount in full or in parts at any time. The interest is calculated daily on the outstanding amount and is usually debited monthly from your account. But as a good practice, please try to repay ASAP.

Example Scenario: Imagine you have an overdraft limit of ₹30,000 on your salary account. You have an unexpected medical expense of ₹25,000, but your account balance is only ₹5,000. You can use the overdraft facility to cover the shortfall and pay. You will then pay interest only on the ₹20,000 overdraft amount used, until it is repaid. And if in the first month you paid ₹10,000 and interest, then from next day you’ll be only charged interest for the rest ₹10,000.

What are the benefits of an Overdraft facility?

Although there is only one major benefit, but let me put it into words to make things easier for you.

You can have instant access to funds: Overdraft facility is the immediate access to funds in times of need.

This can be particularly useful in emergencies, such as sudden medical expenses or urgent repairs or it could be anything, but my personal suggestion will be to get this only in the emergency.

You have all the flexibility in repayment: As explained not like the traditional loans that come with fixed repayment schedules, the overdraft facility offers flexibility in repayment. (And I think this is the best benefit you have.)

You can repay the amount in full or in parts, depending on your financial situation. Additionally, you only pay interest on the amount utilized, not on the entire limit, which can result in significant savings.

Genuine or you can say lower Interest Rates: (Although, I can’t say this very confidently but Interest rates are not on a very high side.)

This makes it a cost-effective option for short-term borrowing, especially when compared to the high-interest rates associated with other forms of unsecured credit.

You don’t have to put anything on Collateral: Overdraft facilities are usually unsecured, meaning you do not need to provide any collateral, such as property or assets, to avail of the facility. This reduces the risk for you and makes it easier to access funds.

Good tool to improves Credit Score: Use of the overdraft facility, with timely repayment, will positively impact your credit score. A good credit score is crucial for obtaining loans, credit cards, and other financial products in the future. Responsible usage demonstrates good financial management, which will enhance your creditworthiness.

And last but best convenience and peace of mind: Knowing that you have access to additional funds provides financial security and peace of mind. 

This facility can be particularly valuable in situations where you may face a temporary cash crunch or need to cover unexpected expenses without relying on expensive loans or credit cards.

What are the situations where the Overdraft facility is particularly beneficial?

There are some situations, which are perfect for using your overdraft facility. Here are some examples (Although, emergencies and urgency is subjective to every individual.)

Emergency Medical Expenses: Medical emergencies can arise unexpectedly and often come with significant costs. The overdraft facility ensures that you have immediate access to funds to cover these expenses without delay, reducing stress during critical times.

Unplanned Large Purchases: Sometimes, you may need to make an unexpected large purchase, such as home repairs, urgent travel, or replacing a broken appliance. The overdraft facility provides the flexibility to cover these expenses without draining your savings or applying for a loan.

Short-Term Cash Flow Issues: If you face temporary cash flow issues due to a delayed salary or unforeseen expenses, the overdraft facility can bridge the gap between your income and expenses. This ensures you meet all your financial obligations, such as paying bills or EMIs, without incurring penalties.

Debt Consolidation: The overdraft facility can also be used to consolidate high-interest debts, such as credit card dues or personal loans. By using the overdraft to pay off these debts, you can benefit from lower interest rates and simplify your repayments.

What are the factors you should consider when you’re using the Overdraft limit?

Interest Costs: While overdraft facilities typically have lower interest rates than other forms of credit, it is essential to understand how interest is calculated and applied. Interest is charged daily on the outstanding amount, so it’s wise to repay the overdraft as soon as possible to minimize the repayment burden.

Repayment Discipline: Having access to extra funds can be tempting, but it is crucial for everyone to use the overdraft facility responsibly. Regular monitoring of your account and careful budgeting are necessary to ensure that you can repay the overdraft on time and avoid falling into a debt trap. It is important to have the repayment discipline.

Interests, Charges and Fees: Be aware of any additional charges or fees associated with the overdraft facility, such as processing fees, renewal charges, or penalties for exceeding the limit. 

Understanding these costs will help you make informed decisions and avoid unexpected expenses.

Credit Score Impact: While responsible use of the overdraft facility can improve your credit score, failing to repay the amount on time can negatively affect your creditworthiness. It is essential to manage your overdraft carefully to maintain a healthy credit profile.

How to apply for an Overdraft facility on a salary account?

Eligibility Criteria: To apply for an overdraft facility on a salary account, you typically need to have regular salary deposits, a good credit history, and an active salary account with the bank. Some banks may also require a minimum account balance or a specific relationship duration with the bank.

Steps to apply:

Mostly you’ll get multiple calls from multiple agents on the behalf of Bajaj Finance and offering you the overdraft limit.

1. Online Application: Many banks allow customers to apply for an overdraft facility online through internet banking or a mobile app.
2. Branch Visit: Alternatively, you can visit your bank branch and speak to a representative about applying for the facility.
3. Documentation: You may need to provide some documents like: 
1. Proof of income: Salary slips or Bank statements or ITR filing or Form 26AS
2. Identification documents: Aadhaar, PAN card, Passport

Once the application is processed and approved, the overdraft limit will be set, and you can start using the facility as needed. Congrats!!

Conclusion

The overdraft facility on a salary account offers numerous benefits, such as instant access to funds, flexible repayment options, lower interest rates, and improved credit scores.

It provides a convenient financial safety net for salaried individuals, especially during emergencies or short-term cash flow issues. 

However, it is essential to use this facility responsibly and understand the associated costs and terms. By doing so, you can take advantage of the overdraft facility to manage your finances more effectively and maintain financial security.