Overdraft

Banking

An overdraft is a credit facility linked to a bank account that allows you to withdraw more than the available balance up to a pre-approved limit. Interest is charged only on the amount actually used -- making it more cost-efficient than a term loan for variable funding needs.

In detail

OD interest is charged only on the daily outstanding balance. Unlike a term loan where interest runs on the full sanctioned amount from day one, OD charges only when and how much you actually use.nnTypes: OD against FD (FD rate + 1-2%), OD against property (10-12%), OD against shares/mutual funds (12-14%), salary OD for salaried individuals.nnBest retail use case: OD against FD as emergency credit line. A Rs 5L FD gives access to Rs 4-4.5L OD at 8-9% -- significantly cheaper than personal loans (14-18%) or credit cards (36-42%), while the FD continues earning interest.

Formula

OD interest = Daily outstanding balance x (Annual rate / 365) Total monthly interest = Sum of (daily balance x daily rate) for each day Effective cost << equivalent term loan for variable usage patterns

Real-life example

🇮🇳 India example

Priya's shop has OD limit of Rs 10L at 11%. In September (peak season) she uses Rs 8L for 30 days: interest = Rs 8L x 11% x 30/365 = Rs 7,233. October, she uses Rs 2L for 30 days: interest = Rs 1,808. Total 2 months = Rs 9,041. A Rs 10L term loan at 11% would cost Rs 18,333 interest for the same period.

Frequently asked questions

Is OD against FD a good emergency credit option? ▼
Yes -- one of the best. Banks grant OD at FD rate + 1-2%. A 7% FD gives OD at 8-9% -- significantly cheaper than personal loans (14-18%) or credit cards (36-42%). Since the FD stays intact (earning interest), the net borrowing cost is even lower. Keep a dedicated FD for this purpose as an emergency backup.