Overdraft is a monetary facility of extending the bank limit that is offered by banks. It is a helpful financial instrument through which you can withdraw money from the current or savings account if the available balance goes below zero.
The money used as an extended amount is called the ‘overdrawn’ limit, and each customer has a pre-defined limit depending on his credibility and his relationship with the financial institution. Banks charge interest on the overdrawn amount.
Interest Rates on Overdraft
The interest rate applied to the overdraft depends on various factors and varies from one person to the other:
● The interest rates levied by private banks are different from those of the public banks.
● The amount of overdraft loan amount
● Tenure of Repayment
● The credibility of the customer
● Relationship of the customer with the bank.
Features and Benefits of the Overdraft Facility
The overdraft facility is significantly useful for customers in many ways:
1. Perfect for mismatch of cash
Overdraft is an aid provided by the banks, to meet the working capital expenditure of an individual in terms of cash flow based on the apr, which means the annual percentage rate of expenses and income. If due to any circumstances, the account balance is low, you can use the overdraft facility to settle the outstanding check balances or to pay a bill that is due.
2. Prevents bouncing checks and enables on-time payments
If the individual does not pay his dues on time or if there is check-bouncing from his account, it can lead to low credibility and a fall in his credit ratings. This can be avoided with the overdraft facility so that non-payment of standing bills can be avoided.
3. Saves time and paper and provides convenience
Instead of applying for strenuous long-term loans and paying a humungous rate of interest on them, an overdraft facility is convenient and requires minimal paperwork. If the account is well within the overdraft period, expenses can easily be managed using this facility which saves time and effort from the consumer’s end.
4. Offered against Salary and Savings accounts and Time deposits.
Several private sector banks offer the overdraft facility against salary and savings accounts. An overdraft can also be made against fixed or recurring deposits. The amount of the overdraft depends on the credit score, repayment history, and the customer’s account value.
5. No collateral required
Overdraft is an unsecured authorisation provided by banks taking many factors like the credibility and reputation of the customer. You don’t need to give any collateral for utilising the facility. You would need to pay an amount of interest and an overdraft fee as levied by the banks on the short-term overdraft facility, which is revised each year.
6. How to Avoid Overdraft Fees
The overdraft facility is a kind of short-term borrowing from the bank which invites a fee and interest that is levied on it for the period; the amount is used. It can be quite troublesome for the consumer to pay these extra charges and it is better for him to rather maintain his accounts than to pay additional charges for the same.
There are some basic tips and techniques to dodge or avoid overdraft fees:
Get rid of the ‘automatic overdrafts’ facility.
Although an overdraft facility can come as a saviour in many conditions wherein you don’t have the available limit to pay for your bills and services, still as a customer, you don’t have to use the overdraft service. All you have to do is to notify the bank and opt-out of any overdraft facility provided by the banks. If there is no balance in your account, a pending bill may get rejected.
Review your financial statements frequently.
You must keep a close watch on your weekly or monthly statements to keep a close tab on your recurring expenses, deposits, savings, and balances. You can hold off major expenses or withdrawals if the balance is low.
Look for financial institutions that don’t charge the overdraft fee.
Many customers have a credible financial history, and there are many banks today, which don’t charge any fees for any extra amount overdrawn for these specific people. If you are one of them, it can be easy for you to dodge overdraft fees.
Use cash instead of your card
It is suggested to use your account balance for monthly loans, EMIs, subscriptions, and fixed payments. For every other minimal expense, it is better to use the money in your pocket.
This helps to maintain a balance that helps to authorised and regularise expenses. The need for an overdraft won’t arise if the accounts are managed well.
Sign up for bank alerts
Technology has revolutionised the banking world. All you need to do is to sign up for alerts using eBanking through a mobile app or website, Touch Tone Teller, or ATMs and get instantly notified when your account balance falls below a certain limit. You need to be smart enough to maintain your account balance and make deposits when it is low.
This is a sound technique offered by banks that simply transfers funds from one operating account within the bank to the other account if it falls short of funds. There may be a minor fee attached to this service but is lower than the overdraft fees.
Change your Loan Due Dates
It becomes difficult to manage your financials if your payday differs from your loan due dates. Make sure you have the available balance in your account before fixing the due date of loans to avoid it, resulting in an overdraft.
Build savings and keep a cushion balance
As a customer, you must maintain a minimum balance in your accounts to avoid an overdraft. There are monthly charges like subscriptions, bills, and other payments that automatically get deducted from the account. So, it is highly recommended to track expenses, check available balance, build savings and make deposits.
An effort to Get the Overdraft Fees Waived
In a situation, wherein the overdraft fee is charged, you can try to get it waived off. It again depends on your equation with your bank and your goodwill in the market.
You can negotiate with the banks by contacting them personally or through an installed app. Normally, a first-time offence is excused if you have a good reason for it.
You must consider strategies to avoid overdraft charges. Although the facility can be helpful in many situations, it is better to keep your financial transactions in control and avoid borrowing funds as an overdraft from the bank which charges overdraft fees that can be quite expensive for you.