Flexibility and accessibility to funds can make a huge difference in managing cash flow and unexpected expenses. The Personal Loan Overdraft Facility offers just that - a blend of flexibility and accessibility.
This blog aims to explain the Personal Loan overdraft facility, discussing its key aspects and benefits to help you make an informed decision.
What is a personal loan overdraft facility?
An overdraft (OD) facility on a personal loan allows you to withdraw funds up to an approved limit at any time, paying interest only on the amount used, not on the total sanctioned limit.
Immediate access to funds: Once approved, the overdraft amount is readily available for use without the need for repeated applications.
Pay interest only on the used amount: Interest is charged only on the overdraft amount you use, not the entire approved limit.
Also Read: Repo Rates & Reverse Repo Rates: Everything You Need To Know
Top benefits of overdraft facility of the personal loan
The Personal Loan overdraft facility is not just about accessing funds; it's also loaded with benefits that can ease your financial management process to a large extent. Some of the benefits of an overdraft facility are:
1. Flexibility in cash management: OD Personal Loan effectively manages cash flow, particularly useful for unexpected expenses.
2. Reduced risk of over borrowing: One of the benefits of an OD Personal Loan is that you only use what you need, which reduces the risk of over-borrowing. This feature is helpful compared to fixed-term loans, where you might borrow more than necessary, leading to unnecessary debt.
3. Immediate response to financial opportunities: The availability of immediate funds allows you to make the most of financial opportunities without delay. Whether taking advantage of a business opportunity or making an urgent large purchase, having instant access to funds ensures you can respond quickly without the waiting period typically associated with loan approvals.
4. Potential lower cost compared to traditional loans: Since interest is only paid on the amount used, it can be less costly than traditional Personal Loans, where interest is paid on the full amount from day one.
Also Read: Understanding The Importance Of A Good CIBIL Score
How does the overdraft facility work?
The Personal Loan Overdraft Facility operates like a flexible line of credit, where you are allowed a pre-determined limit to tap into as needed. Here's a deeper look into how it works:
1. Setting up the overdraft limit: Financial institutions determine your overdraft limit by assessing your credit score, income stability, and banking history. This limit is the maximum amount you can borrow at any given time.
2. Accessibility of funds: An overdraft allows you to withdraw and deposit funds freely. You only need to ensure your balance does not exceed the set limit.
3. Interest calculations: Unlike traditional loans, where interest is calculated on the total loan amount, the overdraft facility charges interest only on the amount you use. This calculation is usually done daily, which can be helpful if you use the funds for short durations.
4. Dynamic repayment structure: There are no fixed EMIs. You can deposit money into the account anytime, reducing the borrowed amount and interest charged. This feature provides flexibility compared to standard loan products. Keep a Personal Loan EMI Calculator handy for quick calculations.
5. Renewal and review: Most banks review the overdraft facility annually, which means your limit can be adjusted based on your financial behaviour and any changes in your credit profile during the year.
Interest rates: Overdraft vs. Standard personal loans
Interest rates for overdraft loans can differ from traditional Personal Loans, often depending on how much of the limit you use.
1. Comparative interest rates: Overdraft interest rates are generally slightly higher than regular Personal Loans but offer the advantage of being charged only on the used amount.
2. Impact on overall cost: The actual cost can be lower if the facility is used cautiously, as interest is charged only on the utilised portion.
Personal loan overdraft eligibility criteria
Not everyone may qualify for an overdraft facility, as lending institutions often have specific criteria. This includes:
1. Credit history and score: A good CIBIL score and a clean credit history can improve your chances of approval.
2. Financial stability: Regular income and financial stability are considered to ensure that you can manage the overdraft responsibly. Opt for a Personal Loan eligibility calculator to save your time & be prepared.
Documents required for applying for a overdraft facility
The application process for an overdraft facility is straightforward but requires certain documents. The personal loan required documents are:
1. Proof of income: Salary slips, tax returns, and bank statements are commonly requested to assess your financial health.
2. Proof of identity and residence: Valid government-issued ID and address proof are necessary for KYC compliance.
Also Read: Understanding The Importance Of A Good CIBIL Score
Managing your overdraft facility efficiently
Efficient managing your overdraft loan is important to avoid excessive fees and maintain a healthy financial status. Here are detailed strategies to help you manage this facility effectively:
1. Regular monitoring of usage: It's essential to check your overdraft usage regularly to ensure you're not exceeding your limit and to keep track of the interest accruing on the borrowed amount. This helps you manage costs effectively.
2. Strategic repayment planning: Aim to repay the used funds as soon as possible. Since interest adds up daily on the amount withdrawn, quicker repayment can majorly reduce the total interest cost.
3. Set up alerts: Use banking alerts to stay informed about your overdraft balance and upcoming payments. This can help you avoid overdrawing beyond your limit, which would have additional charges.
4. Assess interest rates periodically: Monitor the interest rates applied to your overdraft facility, as they may change. Comparing rates periodically can inform decisions about whether to continue using the overdraft or look for cheaper borrowing options.
5. Utilise budgeting tools: Incorporate budgeting software or apps to track and manage your finances. These tools can help you allocate funds more efficiently, ensuring you have enough to cover the overdraft when needed.
The personal loan overdraft facility offers a flexible and efficient way to manage personal finances. It gives ready access to funds up to a pre-approved limit and allows you to pay interest only on what you use.
Whether for managing cash flow or handling unexpected expenses, the overdraft facility can be an amazing financial tool if used wisely.
FAQs
1. How quickly can I access funds under the overdraft facility?
Funds under the overdraft facility are available immediately after the facility is set up and can be accessed anytime within the approved limit.
2. Does the overdraft facility affect my credit score?
Yes, just like any credit product, how you handle your overdraft facility-such as timely repayment and staying within the limit—can impact your CIBIL score.
3. Can I increase the overdraft limit on my Personal Loan?
Yes, you can request an increase in your overdraft limit. However, this is subject to the lending institution's reassessment of your financial situation and creditworthiness.
4. What happens if I exceed my overdraft limit?
Exceeding your overdraft limit can result in fees, higher interest, and charges that negatively affect your credit score.
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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.
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