Q1. What is a Bank Overdraft Loan?
A Bank Overdraft (OD) is a revolving credit line linked to your bank account.
It allows you to withdraw more than your available balance, up to a pre-approved limit, to meet short-term cash flow needs.
Q2. Do I pay interest on the full sanctioned limit?
No. You pay interest only on the amount actually used and for the number of days it remains utilized.
For example, if your OD limit is ₹100,000 and you use ₹20,000 for 20 days, you pay interest only on ₹20,000 for 20 days.
Q3. Is collateral or security required for an overdraft?
Some banks/NBFCs offer unsecured overdrafts for salaried or prime customers, while others may require security such as
fixed deposits, insurance policies, or property. It depends on the lender’s policy and your profile.
Q4. How is the overdraft limit decided?
The OD limit depends on factors like your monthly income, account history, credit score,
existing EMIs, and the relationship value with your bank.
Lenders may review and adjust the limit periodically based on utilization and repayment pattern.
Q5. Who should consider using an overdraft facility?
Ideal for individuals, professionals, or small businesses with variable income or irregular cash inflows.
It suits those needing flexible access to funds without applying for a new loan each time.
Q6. What is the interest rate structure on overdraft loans?
Most banks charge between 11%–20% p.a. on utilized amounts, calculated on a daily reducing balance basis.
Rates vary based on credit profile, type of overdraft (secured/unsecured), and bank relationship.
Q7. How is interest charged and repaid on an OD account?
Interest is usually debited monthly on the utilized amount.
You can repay anytime to reduce interest outgo, and reuse funds within the approved limit multiple times.
Q8. What is the difference between an OD and a Personal Loan?
Overdraft: Flexible credit line, pay interest only on what you use, reusable limit.
Personal Loan: Fixed disbursal with EMIs and interest on full amount from day one.
OD is best for ongoing or unpredictable needs; PL suits one-time expenses.
Q9. Are there fees or charges on overdraft accounts?
Yes, typically —
• Processing/setup fee (0.5%–2%)
• Annual renewal charge
• Interest on usage
• Penal interest for limit breach
• Documentation or stamp duty (where applicable)
Q10. Can I close or reduce my OD facility anytime?
Yes, you can close or reduce the overdraft limit anytime by repaying the outstanding amount and requesting closure with the bank.
Some lenders may levy a small closure fee or require notice before termination.
Q11. Does using an OD affect my credit score?
Yes. Regular repayment and disciplined usage improve your credit score, while over-utilization or missed interest payments
can lower it. Treat OD responsibly like any other credit facility.