Overdraft Facility in Personal Loans: How It Works and Why It Matters

Overdraft Facility in Personal Loans offer stability of a personal loan and the convenience of accessing extra funds as needed.

Updated On: November 27, 2024
8 min, Read

Personal loans are a great way to overcome a sudden financial crunch. But imagine having a personal loan to your name yet you find yourself in a situation where you are in need of extra funds. In that scenario, overdraft facility in personal loans comes handy. Personal loan overdraft facility is a credit line facility that allows you, a person who already has a personal loan to his/her name, to withdraw funds from the loan account as per their agreed upon credit limit. This financial feature combines the benefits of a personal loan with the flexibility of an overdraft. This way you can have more control over your finances as you can withdraw from the loan account as many number of times. The best part about overdraft facility in personal loan is that the interest rate is only applicable on the amount you withdraw, however this makes it ideal for a short term cash needs, generally 2-3 months. But how does it work? In this article, we’ll break down everything you need to know, so you can decide if it’s the right option for you.

Understanding the Overdraft Facility

An overdraft facility within a personal loan allows you to withdraw more money than your available loan amount, up to a certain limit. It’s like having a financial safety net that you can dip into whenever necessary. The beauty of this facility lies in its flexibility—you’re only charged interest on the amount you use, not on the entire overdraft limit. This makes it an ideal solution for handling unexpected expenses or managing cash flow fluctuations.

How the Interest Rate Works

The interest rate on the overdraft facility in a personal loan is typically higher than the interest on the loan itself, but there’s a silver lining. You’re only charged interest on the exact amount you withdraw, and only for the period during which you use it. For instance, if you only dip into your overdraft for a week, you’ll only pay interest for that week. This feature can be a lifesaver when you need temporary financial support without committing to a long-term debt.

Setting the Credit Limit

One of the important factors in the overdraft facility in personal is deciding upon the credit limit. There are many factors by which the lender determines such as your loan amount, credit history, and income. Unlike a regular personal loan, where you receive a lump sum upfront, the overdraft limit acts as a flexible line of credit. You can borrow as little or as much as you need, up to the set limit, giving you greater financial freedom.

The Application Process

Securing an overdraft facility within a personal loan is often straightforward, especially if you’re already approved for the loan. The lender may require additional documentation or a simple agreement to activate the overdraft feature. This streamlined process means you can access extra funds faster than applying for a new loan, making it a convenient option for urgent financial needs.

Repayment and Tenure

Repaying the overdraft facility is as flexible as its usage. You can pay off the amount you’ve withdrawn at any time, without adhering to a fixed repayment schedule. However, the longer you take to repay, the more interest you’ll accumulate. Therefore, it’s wise to use this facility for short-term needs and repay as quickly as possible to minimize costs.

Prepayment Charges and Fees

One of the standout advantages of an overdraft facility is the lack of prepayment charges. You have the freedom to pay off the borrowed amount whenever it’s convenient, without worrying about penalties. This feature, combined with the absence of fixed monthly instalments, allows for better financial management and planning.

Eligibility Criteria

To be eligible for an overdraft facility within a personal loan, you generally need to meet specific criteria set by the lender. This could include maintaining a good credit score, demonstrating a stable income, and having a solid repayment history on your existing loan. These factors help the lender assess your ability to manage the additional credit responsibly.

Documents Required

While the documentation for an overdraft facility is typically less intensive than that for a new loan, you’ll still need to provide some essential documents. These usually include proof of identity, address, and income. If your personal loan is already in place, the paperwork might be minimal, making the process even smoother.

Conclusion

The overdraft facility in a personal loan is a powerful tool for managing your finances with greater flexibility and control. It offers the best of both worlds: the stability of a personal loan with the added convenience of accessing extra funds as needed. Whether you’re dealing with unexpected expenses or just want a financial cushion, this facility can be a valuable part of your financial strategy. However, it’s essential to use it wisely—understand the costs involved, and always aim to repay the borrowed amount promptly. With careful planning, the overdraft facility can be a great ally in your financial journey.