How the overdraft facility should be used?

A contingency fund will not always be enough to meet any kind of financial emergency that arises in your life. Even though most of the people keep aside at least 3 to 6 months of their expenses as instructed by their financial consultants, but there might come a moment where you might need the money in quick time and for a short period.

The one thing you can think of is availing a bank overdraft facility, which can be taken by keeping your assets as security with the bank. This is one of the best ways to raise short-term funds for any sort of contingency that arises. Banks can offer you an overdraft facility if you keep your assets such as property, securities and life insurance policies. The rate of interest has to be paid by the individuals on the amount which is depended upon the tenure.

What is meant by an overdraft?

An overdraft facility is the credit which is given by the bank to its clients against his/her assets. For instance an individual could mortgage hi/her house with a bank and get the credit limit sanctioned against it.

The money is not rolled out to you immediately. It is like an approved loan and as and when you desire, you can withdraw money from this overdraft account. And of course interest has to be paid on the money you borrow.

You can borrow and keep repaying your money for as long as the bank is ready to give such overdraft facility. The rate of interest against property ranges from 12 to 14% per annum.

You can keep assets such as your insurance policies, shares, bonds and bank fixed deposits. The rate of interest is for each of these collaterals. Banks charge 1% more than the payable rate for the overdraft against fixed deposits.

The Procedure

This facility involves the same procedure as that of getting any other loan. You can give the bank a number of collaterals, for example your house, shares, insurance policies, FD’s and get an overdraft facility. But each of the collaterals has their pros and cons.

For instance, if you take an overdraft facility against your property, it would give you a larger credit as compared to some other asset. But the evaluation of the property might take some time. The transaction might be quick by the bank if the facility is issued against the FD’s.

Banks are more comfortable in giving this facility against FD’s and life insurance policies. Usually, life insurance policies do not give good returns. So these can be put to productive use by taking an overdraft against these assets.

For example if the banks are offering 50% of the value of property as credit, they might offer up to 70% of the value in case of an FD. These overdraft limits are approved for a year and is being reviewed each year by the banks.

Should you take an Overdraft Facility?

Overdraft facility is made for disciplined and honest individuals. As many people tend to misuse the funds by using them into speculative activities, which may backfire. So if you lose the money in such speculative activities, you will have to pay an additional interest which is accrued on the overdraft taken. The bank might liquidate the asset if you fail to pay the money on time.

Summary

The overdraft facility is an extra line of credit given by banks to its clients. This is a good way to raise funds in a short span of time and for a short duration. The people should be disciplined when they opt for an overdraft facility.

Author

Mr. Tejinder Singh runs the site www.propertiesandloans.com, which other than the overdraft facility provides assistance regarding personal loans in Bangalore. It also provides guidance regarding ICICI personal loans in the country.

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Created on Dec 31st 1969 18:00. Viewed 0 times.

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