Managing short-term cash flow can be challenging — whether you’re a salaried professional, business owner, or freelancer. That’s where an Overdraft (OD) facility comes in handy. It’s a flexible banking feature that allows you to withdraw more money than you currently have in your account, giving you instant access to extra funds when you need them most. Unlike personal loans that require fixed EMIs, an overdraft lets you borrow, repay, and reuse funds as needed — and you pay interest only on the amount used. In this guide, we’ll explain what an overdraft facility is, how it works, who is eligible, and how it compares to a personal loan, so you can choose the right credit option for your financial needs.
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| Overdraft vs Personal Loan – Understand how an overdraft facility works, who’s eligible, and when it’s better than a personal loan. |
🏦 What is an Overdraft (OD)?
An Overdraft (OD) is a credit facility offered by banks that lets you withdraw more money than you currently have in your bank account, up to a pre-approved limit.
It acts as a short-term loan that gives you quick access to funds when your balance falls short. The key advantage is that you pay interest only on the amount you actually use, not the entire overdraft limit.
Example: If your OD limit is ₹2,00,000 and you withdraw ₹50,000, you’ll pay interest only on ₹50,000 until you repay it.
Learn how Overdraft (OD) works, who can get it.
💼 How to Get an Overdraft Facility
Applying for an overdraft is simple, whether you’re a salaried individual, Saving Account, business owner, or self-employed professional.
Steps to Apply for OD:- Visit your bank branch or log in to online banking.
- Submit the OD application form.
- Provide KYC documents, income proof (salary slips, ITR, etc.), and bank statements.
- The bank reviews your creditworthiness and approves a credit limit based on your profile.
- Once approved, the OD limit becomes available in your account for instant use.
Tip: Many banks like HDFC Bank, SBI, ICICI, and Axis Bank offer overdrafts on salary or current accounts — check your eligibility online.
👤 Eligibility Criteria for Overdraft Facility
| Category | Typical Eligibility |
|---|---|
| Salaried Individuals | Salary credited in same bank, stable employment, good credit score (700+) |
| Self-employed Professionals | Regular business income, filed ITRs for 2–3 years |
| Businesses | Strong turnover and current account relationship |
| Property/FD Holders | Can avail secured OD against FD, property, or insurance policies |
💡 Important Things to Consider Before Taking an OD
- Interest Rate: Usually 1–2% higher than home loans but lower than personal loans or credit cards.
- Interest Calculation: Daily, only on the utilized amount.
- Repayment Flexibility: No fixed EMIs; repay anytime to save interest.
- Collateral: May be secured (against assets) or unsecured.
- Renewal: Most banks renew OD limits annually.
- Discipline: Easy access to cash can tempt overspending — plan usage carefully.
💳 How to Use Overdraft Facility Effectively
- Use OD for short-term cash flow gaps or emergencies, not long-term borrowing.
- Repay quickly to minimize interest.
- Monitor usage via your bank app or statement.
- Keep your credit utilization ratio low to maintain a good credit score.
- Avoid using OD to cover non-essential expenses.
🧠 Who Should Opt for an Overdraft?
An OD is suitable for:
- Business owners handling fluctuating cash flows.
- Freelancers or self-employed professionals with irregular income.
- Salaried individuals needing short-term liquidity.
- FD or property owners wanting to borrow without breaking assets.
⚖️ Overdraft vs Personal Loan: What’s the Difference?
| Feature | Overdraft (OD) | Personal Loan |
|---|---|---|
| Purpose | Short-term, flexible | Long-term, fixed purpose |
| Disbursement | Withdraw as needed | Lump-sum credited upfront |
| Interest | Only on used amount | On full amount from day one |
| Repayment | Flexible | Fixed EMIs monthly |
| Tenure | 1 year, renewable | 1–5 years |
| Collateral | May be secured | Usually unsecured |
| Best For | Cash flow management | One-time expenses (e.g., wedding, travel) |
Note: Choose Overdraft for short-term flexibility and Personal Loan for planned, long-term needs.
🚀 Benefits of Overdraft Facility
- ✅ Flexible borrowing and repayment
- ✅ Pay interest only on what you use
- ✅ Quick approval (especially for existing customers)
- ✅ Ideal for managing short-term liquidity
- ✅ Can be secured against FD or property for lower rates
⚠️ Common Mistakes to Avoid
- Keeping OD balance high for long periods
- Using OD for lifestyle expenses
- Ignoring renewal terms and interest charges
- Applying for multiple ODs simultaneously (hurts credit score)
📝 Conclusion: Is Overdraft Better Than a Personal Loan?
An Overdraft facility is one of the most versatile banking tools for managing short-term financial needs. It offers flexibility, quick access to funds, and interest savings compared to traditional personal loans — provided you use it responsibly.
If you need money frequently for cash flow gaps, an OD makes sense.
If you need a one-time lump sum for a large expense, a Personal Loan may be more suitable.
🧠 Frequently Asked Questions (FAQs) About Overdraft Facility
What is an Overdraft facility in banking?
An Overdraft (OD) is a credit facility that allows you to withdraw more money than what’s available in your bank account, up to a pre-approved limit. You pay interest only on the amount you use, making it a flexible short-term borrowing option.
How does an Overdraft work?
When you use an overdraft, your bank temporarily lends you money beyond your available balance. Interest is charged daily on the used amount, and you can repay anytime to reduce the interest cost. Once repaid, you can use the limit again — like a revolving credit line.
Who is eligible for an Overdraft facility?
Eligibility depends on your income, account history, and credit score. Typically, salaried individuals, business owners, self-employed professionals, and FD or property holders can apply. Having a good credit score (700+) improves approval chances.
What is the interest rate on an Overdraft facility?
Interest rates on overdraft accounts vary by bank and customer profile, usually ranging between 10% and 18% per annum. However, you’re charged only on the utilized amount, not the entire OD limit.
Is an Overdraft better than a Personal Loan?
It depends on your needs.
Choose Overdraft for short-term cash flow gaps — flexible usage, repay anytime.
Choose Personal Loan for long-term, one-time expenses — fixed EMIs and tenure.
Overdrafts can save interest if used smartly and repaid quickly.
Does an Overdraft affect your credit score?
Yes. Regular overdraft usage and timely repayments can improve your credit score. However, exceeding your limit or maintaining a high outstanding balance for long periods can negatively impact your score.
Can I get an Overdraft without collateral?
Yes, many banks offer unsecured overdrafts to salaried customers or small businesses with strong financial records. However, secured overdrafts (against FD, property, or insurance policies) usually come with lower interest rates.
How can I apply for an Overdraft online?
You can apply through your bank’s online portal or mobile app. Log in, check “Credit or Overdraft Facility” under loan services, fill in your details, and upload income documents. Many banks offer instant OD approvals for eligible customers.
What is the maximum Overdraft limit I can get?
Your overdraft limit depends on factors like income, account balance, banking relationship, and collateral. For individuals, it usually ranges from ₹50,000 to ₹5 lakh, while businesses can get higher limits based on turnover.
What happens if I don’t repay my Overdraft?
If you fail to repay the used overdraft amount, your bank will continue charging interest and may also penalize for overdue payments. Prolonged non-repayment can hurt your credit score and may result in legal or recovery action for secured ODs.