An Overdraft Account (OD) is a financial service that allows individuals or businesses to withdraw more money from their bank account than what is currently available. In the world of finance, overdrafts are particularly helpful in managing liquidity problems, especially for small businesses that face seasonal fluctuations in revenue or individuals dealing with emergency expenses. This flexibility means that instead of applying for a loan every time you need extra funds, the overdraft allows you to access money immediately within a predetermined limit.

Why Understanding OD Interest Rates & Features is Important

Overdraft interest rates are different from traditional loan interest rates. Unlike personal loans or home loans, where you are required to repay a fixed EMI over a specific period, an overdraft only charges interest on the amount you withdraw, not the entire sanctioned limit. This means you could have a ₹1 lakh overdraft limit but only pay interest on the ₹10,000 you use.

Since overdraft accounts come with variable interest rates and flexible repayment options, understanding these features can help individuals and businesses manage their finances efficiently. The purpose of this blog is to explain everything you need to know about overdraft accounts, including their interest rates, types, and key benefits. By the end of this blog, you will have a clearer picture of how an overdraft can fit into your financial planning.

Importance of Overdrafts in Financial Planning

Overdrafts play a crucial role in personal and business financial planning. Whether it’s covering short-term operational costs or managing an emergency fund, an overdraft account provides instant access to additional funds without the need for lengthy loan application processes. For instance, if a business is awaiting payment from clients but needs to pay its suppliers, an overdraft can provide the necessary liquidity to keep things running smoothly.

Moreover, overdrafts can serve as a financial cushion during unpredictable times, such as a sudden medical emergency, home repairs, or temporary cash crunches. Since interest is only charged on the utilized amount, it’s a cost-effective way to manage financial hiccups without falling into debt traps.

What is an Overdraft Account?

An Overdraft Account is a credit facility offered by banks and financial institutions, allowing account holders to withdraw more money than their available balance. The bank pre-approves an overdraft limit based on various factors such as the account holder’s financial history, income, and relationship with the bank.

Think of it as having a credit line attached to your bank account. For example, if your current balance is ₹5,000 but you need ₹10,000 to pay a bill, the overdraft facility lets you withdraw the additional ₹5,000 (up to your overdraft limit). You are only required to pay interest on the amount you have used, not on the full overdraft limit.

Difference Between an Overdraft and a Regular Loan

While both overdrafts and loans are forms of credit, they operate differently:

• Overdrafts provide a revolving credit facility, meaning you can borrow, repay, and borrow again within the approved limit, much like a credit card. Interest is only charged on the amount utilized.
• Loans, on the other hand, are one-time disbursements that you repay over a set period through fixed monthly EMIs. The entire loan amount attracts interest from day one, unlike an overdraft.

Thus, overdrafts offer more flexibility and are better suited for handling short-term cash flow needs, whereas loans are preferable for long-term financial commitments.

Types of Overdraft Accounts

There are primarily two types of overdraft accounts: Secured Overdrafts and Unsecured Overdrafts. Let’s look at both in detail:

1. Secured Overdraft
   • A secured overdraft is backed by collateral such as Fixed Deposits (FDs), insurance policies, or other financial assets. Since the bank has a form of security, the interest rate on secured overdrafts is typically lower than on unsecured overdrafts. For example, if you have a fixed deposit of ₹5 lakhs with a bank, the bank may offer you an overdraft of up to 85-90% of the FD amount, using it as security.
2. Unsecured Overdraft
   • An unsecured overdraft, as the name suggests, does not require any collateral. The bank grants this facility based on your financial history, credit score, and the overall relationship you have with the bank. Since there’s no collateral involved, the interest rates for unsecured overdrafts are generally higher than those for secured overdrafts.

Eligibility Criteria for Overdraft Accounts

Eligibility for an overdraft account depends on several factors. Here are some of the common criteria used by banks and financial institutions:

• Minimum Income: To qualify for an overdraft account, the bank usually sets a minimum income threshold. This could vary depending on whether you are a salaried individual or a business owner.
• Credit Score: Your CIBIL score or credit rating plays an important role in determining whether you are eligible for an unsecured overdraft. A good credit score increases the chances of approval and also results in better interest rates.
• Account History: Banks often look at the length of your relationship with them. Customers who have maintained their accounts well, with consistent deposits and no history of bounced cheques, are more likely to get overdraft approvals.
• Type of Collateral: If you are applying for a secured overdraft, the type and value of the collateral (like FDs or property) will influence the overdraft limit and the interest rate offered.

Understanding these eligibility factors can help individuals and businesses prepare better before applying for an overdraft, ensuring that they meet the necessary criteria to avoid rejection.

How Overdraft Accounts Work

An overdraft account allows you to withdraw more money than what’s available in your bank account. Essentially, the bank provides you with a line of credit that you can tap into when needed. For instance, if you have ₹2,000 in your account but require ₹5,000 to cover expenses, the overdraft facility allows you to withdraw the additional ₹3,000 (up to your approved limit). The overdraft balance must be repaid within a specified time, and interest is charged only on the amount utilized.

Banks and financial institutions provide overdraft facilities linked to savings, current, or business accounts, helping account holders manage cash flow gaps without taking out a separate loan.

Overdraft Limits

The overdraft limit is the maximum amount you can overdraw from your account. This limit is set by the bank and is influenced by several factors, including your income, credit score, and financial history with the bank. For instance, a salaried individual may receive an overdraft limit based on their monthly salary, while businesses might be offered a limit based on their revenue.

Customers with good financial standing and a long-term relationship with the bank are likely to receive higher overdraft limits and better terms.

Interest Charges on Overdrafts

One of the key benefits of an overdraft account is that interest is charged only on the amount you utilize, not on the entire approved limit. For example, if your overdraft limit is ₹1 lakh but you only withdraw ₹20,000, the bank will charge interest on ₹20,000 and not the full ₹1 lakh. This makes overdrafts a cost-effective borrowing solution, especially when compared to loans that charge interest on the entire principal.

Repayment Process

Overdraft accounts offer flexible repayment options compared to term loans. There are no fixed EMIs, and you can repay the overdraft balance as and when you have funds available. However, it’s important to clear the overdraft dues within a stipulated period to avoid higher interest charges.

Additionally, many banks offer an auto-debit facility, ensuring that interest payments are automatically deducted from your account, reducing the risk of missing payments and incurring penalties.

Key Features of Overdraft Accounts

1. Flexible Borrowing

One of the standout features of overdraft accounts is their flexibility. You can withdraw money multiple times up to the approved limit, and repay it whenever possible, offering a revolving line of credit. This feature is especially helpful for businesses that face seasonal revenue fluctuations or individuals needing funds for short-term cash flow problems.

2. Interest on Utilized Amount

Unlike loans, where interest is charged on the entire loan amount from the outset, overdrafts charge interest only on the amount you use. For instance, if your overdraft limit is ₹50,000 and you’ve used only ₹15,000, you’ll only pay interest on the ₹15,000. This helps borrowers save on unnecessary interest charges.

3. No Fixed Repayment Schedule

Unlike traditional loans that come with a fixed EMI schedule, overdrafts provide flexible repayment options. You can repay the borrowed amount whenever you have excess funds, making overdrafts a good option for managing irregular or unpredictable cash flows. However, it’s crucial to clear the outstanding balance periodically to avoid mounting interest.

4. Auto Debit Feature

Many banks offer an auto-debit facility on overdraft accounts. This feature automatically debits your account for interest payments or dues, ensuring that you don’t miss any payments and helping maintain a positive financial relationship with the bank. The auto-debit feature also reduces the hassle of manually tracking interest payments.

5. Linked to Various Accounts

Overdraft facilities can be linked to savings accounts, current accounts, or business accounts, providing versatility and easy access to additional funds. This linkage ensures that you can manage your finances from a single account, reducing the need for multiple financial products or services.

6. Easy Access to Funds

The convenience of an overdraft account lies in the immediate availability of funds. Whether it’s an emergency or a temporary shortage of cash, you can withdraw funds up to the approved limit without any lengthy approval process. This easy access makes overdrafts a valuable tool in financial planning.

Interest Rates on Overdraft Accounts

Interest on overdrafts is generally calculated daily or monthly based on the outstanding amount. For example, if you’ve used ₹20,000 from your overdraft limit, the bank will calculate the interest on this amount daily. The total interest for the month will depend on how long you’ve maintained the outstanding balance. This flexible interest calculation ensures you’re not overburdened with high costs.

Factors That Influence OD Interest Rates

Several factors determine the interest rate for an overdraft account:

1. Credit Score: A higher CIBIL score often results in a lower interest rate.
2. Relationship with the Bank: Long-term customers or those who have multiple accounts with the bank may receive better interest rates.
3. Income Stability: Individuals with stable, regular incomes are considered lower risk and may be offered more favourable terms.
4. Type of Overdraft: Secured overdrafts, which are backed by collateral (like Fixed Deposits), typically have lower interest rates compared to unsecured overdrafts, which are based on financial history and income.

Comparison of OD Interest Rates vs. Personal Loan Interest Rates

Overdraft interest rates can vary significantly depending on the bank and your financial profile. However, they are generally higher than traditional personal loan interest rates, which are set for a fixed amount over a specific tenure. Overdrafts, being more flexible and less restrictive, often come with slightly higher interest rates, but they also offer the advantage of paying interest only on the amount used.

Example of OD Interest Calculation

Let’s say you have an overdraft limit of ₹50,000, and you withdraw ₹10,000 for 15 days. If the interest rate is 12% per annum, the interest for the 15 days would be calculated as follows:

• (₹10,000 x 12% / 365) x 15 = ₹49.31

This is how you only pay interest on the amount you use and for the duration that you use it.

Overdraft vs. Credit Card Interest Rates

Overdrafts are often more cost-effective than credit cards, especially for short-term borrowing. While credit cards may charge interest rates between 24-36% per annum, overdrafts typically offer lower interest rates based on your profile and relationship with the bank. However, credit cards often come with added perks like rewards and cashback, while overdrafts focus solely on providing short-term liquidity.

Types of Overdraft Accounts

1. Secured Overdraft Account

A secured overdraft account is backed by collateral such as Fixed Deposits (FDs), shares, mutual funds, or even life insurance policies. This collateral acts as security for the bank, allowing the borrower to access funds at a lower interest rate due to reduced risk. The limit for a secured overdraft is often determined by the value of the asset provided as security. For example, if you pledge a fixed deposit of ₹1 lakh, you may be allowed an overdraft limit of up to 90% of that amount.

Secured overdrafts are popular because they offer lower interest rates compared to unsecured overdrafts, making them a cost-effective way of borrowing for both individuals and businesses.

2. Unsecured Overdraft Account

An unsecured overdraft account, on the other hand, does not require any collateral. Instead, it is granted based on the applicant’s creditworthiness, banking history, and relationship with the bank. Since there’s no collateral backing this overdraft, the interest rates tend to be higher, and the limit offered is generally lower compared to secured overdrafts.

Banks will review your CIBIL score, income stability, and account history before sanctioning an unsecured overdraft, making this option suitable for individuals and businesses with good financial records but without assets to pledge.

3. Overdraft Against Salary Account

For salaried individuals, many banks offer an overdraft against salary accounts. This facility allows employees to borrow funds based on their monthly salary, with the overdraft limit often set at a multiple of their salary (for instance, 3 to 5 times their monthly income). This type of overdraft is generally unsecured but comes with relatively lower interest rates due to the regular inflow of salary into the account, which minimizes the bank’s risk.

This facility is highly beneficial for managing short-term cash flow needs, especially for salaried individuals with regular income but temporary cash shortages.

4. Business Overdraft Account

A business overdraft account is tailored specifically for businesses, offering them a revolving line of credit to manage operational expenses, payroll, and inventory costs. Businesses can withdraw funds when needed and repay them as cash flow improves, helping them manage seasonal fluctuations or unexpected expenses.

Banks usually determine the overdraft limit based on the business’s annual revenue, credit profile, and relationship with the bank. Business overdraft accounts are a preferred option for companies looking to avoid the long-term burden of term loans.

5. Overdraft Against Property (ODP)

An Overdraft Against Property (ODP) is a type of secured overdraft where the borrower pledges their residential or commercial property as collateral. This allows the borrower to access a higher overdraft limit compared to other types of secured loans, making it ideal for individuals or businesses requiring substantial funds.

Since the property is a high-value asset, the interest rate for an ODP is generally lower, and the overdraft limit can be as high as 50% to 60% of the property’s value.

Benefits of Overdraft Accounts

Instant Access to Extra Funds

One of the primary advantages of an overdraft account is immediate access to additional funds. You don’t need to go through the hassle of applying for a new loan every time you need extra cash. The overdraft facility is pre-approved, and you can use it as and when required, providing much-needed liquidity in times of financial stress.

Interest Only on Usage

Unlike traditional loans where you pay interest on the entire loan amount, overdrafts only charge interest on the amount you use. This makes overdrafts a cost-effective solution for short-term borrowing. For example, if your overdraft limit is ₹1 lakh, but you only utilize ₹30,000, interest is charged solely on the ₹30,000.

No Fixed Repayment

Overdraft accounts offer flexibility in repayment as there’s no fixed EMI schedule. You can repay the utilized amount at your convenience, making it easier to manage cash flows. This feature is especially beneficial for businesses and individuals with irregular income.

Improved Cash Flow Management

For businesses, overdraft accounts are an excellent tool for managing cash flow. They help companies cover seasonal expenses, unexpected bills, or other operational costs without committing to long-term borrowing. This flexibility helps businesses maintain liquidity and avoid cash crunches.

Overdraft as an Emergency Fund

A personal overdraft account can serve as an emergency reserve, allowing individuals to handle unexpected financial crises like medical expenses, car repairs, or sudden home repairs without having to apply for a separate loan. The ease of access makes overdrafts a reliable backup plan.

Boosts Financial Credibility

Using an overdraft facility responsibly and making timely repayments can help improve your credit score. A higher credit score can increase your chances of getting approved for future loans and may even help you secure better terms like lower interest rates. Regularly repaying your overdraft dues shows financial discipline and builds a positive relationship with the bank.

Common Fees for Overdraft Accounts

Processing Fees

Many banks charge a one-time processing fee when you set up an overdraft account. This fee can vary depending on the bank and the type of overdraft. For instance, secured overdrafts may have lower processing fees than unsecured ones. It’s important to check these charges before availing of an overdraft facility, as they can add to the overall cost of borrowing.

Annual Maintenance Charges

Some banks levy annual maintenance charges for maintaining the overdraft facility. This fee is typically charged once a year, and the amount can vary based on the type of overdraft and the bank’s policies. These fees are applicable even if you don’t use the overdraft, so it’s essential to factor this cost into your financial planning.

Penal Interest for Exceeding Limit

If you exceed your sanctioned overdraft limit, the bank may charge a penal interest on the excess amount. This interest is higher than the regular overdraft interest rate and is imposed to discourage borrowers from overextending their credit. Staying within your approved limit is crucial to avoid incurring additional costs.

Late Payment Fees

If you fail to repay the utilized overdraft amount on time, the bank may charge late payment fees. These penalties can quickly accumulate, increasing your overall borrowing cost. Some banks also impose penalty interest rates on overdue amounts, which are significantly higher than regular interest rates.

Foreclosure Charges

If you decide to close the overdraft account before the agreed term, some banks may charge foreclosure fees. These charges are typically levied to recover the bank’s processing and administrative costs. While not all banks impose foreclosure fees, it’s essential to review the terms and conditions before availing of an overdraft facility.

Risks and Precautions When Using Overdraft Accounts

Risk of Over-Borrowing

One of the most significant risks associated with overdraft accounts is the danger of over-borrowing. The convenience of accessing extra funds can lead to excessive borrowing, making it easy for individuals and businesses to rely too heavily on overdrafts. This can create a cycle of debt that is challenging to break. Over time, the accumulated interest on the utilized amounts can lead to substantial financial strain, impacting overall financial health.

To mitigate this risk, it’s crucial to maintain a clear budget and monitor expenses closely. Setting a personal borrowing limit and adhering to it can help prevent falling into a debt trap.

High Interest for Unsecured OD

Unsecured overdraft accounts may offer flexibility, but they often come with higher interest rates compared to secured overdrafts. Without collateral backing the borrowing, banks impose elevated rates to offset the increased risk. This can make the cost of borrowing significantly higher, especially if the overdraft is utilized for an extended period.

Potential borrowers should assess their financial situation and ensure that they understand the terms of the overdraft facility. Opting for a secured overdraft can be a better alternative if lower interest rates are a priority.

Impact on Credit Score

Improper handling of overdrafts can hurt your credit score. Missed payments, exceeding the overdraft limit, or frequently maxing out the overdraft can signal financial mismanagement to credit bureaus. Such behaviour can lower your credit score, making it more difficult to secure future loans or credit at favourable rates.

To maintain a healthy credit score, it’s essential to repay the utilized overdraft amounts on time and keep your usage within the approved limits. Regular monitoring of your credit score can also help you identify potential issues before they escalate.

Penalties for Exceeding Limit

Exceeding your sanctioned overdraft limit can lead to financial penalties. Banks typically charge penal interest on the excess amount withdrawn, which can significantly increase your overall borrowing cost. Additionally, repeated violations of the overdraft limit may lead to stricter terms or even revocation of the overdraft facility altogether.

To avoid such penalties, it’s crucial to stay within the approved limit and communicate with your bank if you anticipate needing a higher limit. Many banks may be willing to review and adjust your limit based on your financial situation.

Fraudulent Overdraft Schemes

With the rise of digital banking, there are increasing instances of fraudulent overdraft schemes targeting unsuspecting individuals. Scammers may offer attractive overdraft facilities or loans with enticing terms, only to later impose hidden charges or high interest rates. Engaging with predatory lenders can lead to financial exploitation and severe debt.

To protect yourself, always verify the credibility of financial institutions offering overdrafts. Research the bank or lender, read reviews, and consult with financial advisors if needed. Avoid sharing personal information with unverified sources and be cautious of offers that seem too good to be true.

Conclusion

Understanding overdraft accounts, including their features, benefits, and associated risks, is essential for making informed financial decisions. Overdraft accounts can provide a valuable safety net for managing short-term cash flow needs but must be used judiciously to avoid potential pitfalls such as over-borrowing and negative impacts on credit scores.

Before opting for an overdraft, it’s vital to carefully evaluate your financial needs and capabilities. Different types of overdrafts suit various purposes, and understanding the terms and conditions can help you select the right option for your circumstances. Consider factors such as interest rates, repayment flexibility, and potential fees to ensure that your choice aligns with your financial goals.

At Kreditbazar, we understand that choosing the right financial product can be daunting. That’s why we partner with multiple NBFCs and banks to offer personalized Lending solutions tailored to your needs. Explore our competitive rates and flexible terms to find the perfect Loan option for your financial journey. Contact us today to learn more about how we can assist you in navigating your financial landscape with confidence.

Frequently Asked Questions about Overdraft Accounts

Q1. What is overdraft and its features?
Ans1. An overdraft is a financial facility that allows individuals or businesses to withdraw more money than their current account balance, up to a specified limit. Key features include flexible borrowing, the ability to access funds quickly, and interest charged only on the utilized amount. Overdrafts can be beneficial for managing short-term cash flow issues.

Q2. What is the interest rate of an overdraft?
Ans2. Overdraft interest rates vary by bank and depend on factors such as the type of overdraft (secured or unsecured), the borrower’s creditworthiness, and the bank’s policies. Typically, overdraft rates can be higher than personal loan rates, so it’s essential to compare offers from different banks and NBFCs. Kreditbazar partners with multiple high-ranked NBFCs to help you find competitive overdraft rates.

Q3. What type of account is an overdraft account?
Ans3. An overdraft account is usually linked to a checking or savings account that allows account holders to withdraw more than their available balance. It acts as a short-term credit facility and can be either secured (backed by collateral) or unsecured (based on creditworthiness).

Q4. What is bank overdraft interest?
Ans4. Bank overdraft interest is the fee charged by banks on the amount withdrawn beyond the available balance in an overdraft account. Interest is typically calculated daily based on the outstanding overdraft amount, making it essential to manage usage carefully to avoid high-interest charges.

Q5. What are the two types of overdrafts?
Ans5. The two main types of overdraft accounts are:

1. Secured Overdraft: Backed by collateral such as fixed deposits or property.
2. Unsecured Overdraft: Granted based on the borrower’s credit history and banking relationship.

Q6. What is the overdraft limit?
Ans6. The overdraft limit is the maximum amount that a bank allows an account holder to withdraw beyond their account balance. This limit is determined by factors such as the account holder’s income, credit score, and banking relationship.

Q7. Which bank overdraft is best?
Ans7. The best bank overdraft depends on individual needs, such as interest rates, fees, and repayment flexibility. It’s advisable to compare various banks and NBFCs to find the overdraft facility that best suits your financial situation. Kreditbazar can assist you in exploring options from top lenders.

Q8. Is overdraft interest-free?
Ans8. Generally, overdrafts are not interest-free. However, some banks may offer promotional or introductory periods with lower interest rates. It’s essential to read the terms and conditions before opting for an overdraft.

Q9. How to calculate the OD limit?
Ans9. The overdraft limit is calculated based on various factors, including the account holder’s income, credit score, and the bank’s assessment of the individual’s repayment capacity. It’s advisable to check with your bank for specific criteria.

Q10. Is overdraft good or bad?
Ans10. Overdrafts can be beneficial for managing short-term cash flow issues and providing quick access to funds. However, they can lead to high-interest costs and debt if not used wisely. Proper financial planning is crucial.

Q11. What is the advantage of overdraft?
Ans11. The primary advantages of overdraft include immediate access to additional funds during emergencies, flexibility in repayment, and interest charged only on the amount used, making it a cost-effective solution for short-term financial needs.

Q12. Does OD affect CIBIL score?
Ans12. Yes, how you manage your overdraft can impact your CIBIL score. Timely repayments can improve your credit score, while defaults or exceeding limits can negatively affect it.

Q13. What are the 4 benefits of overdraft protection?
Ans13. The benefits of overdraft protection include:

1. Prevention of bounced checks.
2. Access to extra funds in emergencies.
3. Avoidance of high fees for insufficient funds.
4. Flexibility in managing short-term cash flow.

Q14. What is the main disadvantage of overdraft?
Ans14. The main disadvantage of overdrafts is the potential for high-interest charges, particularly with unsecured overdrafts. Over-reliance on overdraft facilities can also lead to debt accumulation.

Q15. What are the risks of overdrafts?
Ans15. Risks associated with overdraft accounts include over-borrowing, high interest rates for unsecured overdrafts, negative impact on credit scores, and penalties for exceeding the overdraft limit.

Q16. What is the overdraft fee?
Ans16. The overdraft fee is a charge imposed by banks when account holders withdraw more than their available balance. Some banks also charge a fee for setting up the overdraft facility.

Q17. Can you transfer money from an overdraft?
Ans17. Yes, you can typically transfer funds from your overdraft account to cover expenses. However, it’s essential to monitor usage to avoid high interest charges.

Q18. Can I withdraw money with an overdraft?
Ans18. Yes, you can withdraw money up to your approved overdraft limit, even if your account balance is insufficient.

Q19. How to check overdraft eligibility?
Ans19. To check overdraft eligibility, contact your bank or lender and inquire about their specific requirements, such as minimum income, credit score, and account history. Kreditbazar can also help you assess your eligibility with our partner lenders.

Q20. What is the CC limit?
Ans20. The CC limit, or cash credit limit, refers to the maximum amount that a bank allows a borrower to withdraw in a cash credit account, similar to an overdraft.

Q21. What is a 0% overdraft?
Ans21. A 0% overdraft typically refers to a promotional offer where the bank waives interest charges for a limited time on the overdraft facility. Check with your bank for details.

Q22. What are the features of an overdraft?
Ans22. Features of an overdraft include flexible borrowing, interest charged only on the utilized amount, easy access to funds, and no fixed repayment schedule.

Q23. How is overdraft interest calculated?
Ans23. Overdraft interest is typically calculated daily based on the outstanding amount. The formula often used is (Overdraft Amount x Interest Rate) / 365.

Q24. What are the two disadvantages of an overdraft?
Ans24. Two disadvantages of overdrafts are high interest rates, especially for unsecured overdrafts, and the potential for financial mismanagement leading to debt accumulation.

Q25. What is the policy of overdraft?
Ans25. The overdraft policy outlines the terms and conditions of the overdraft facility, including eligibility criteria, fees, interest rates, and repayment terms. It’s important to review these details before availing of the service.

Q26. How many times can I overdraft my account?
Ans26. You can overdraft your account up to your approved overdraft limit. However, frequent over-drafting may lead to penalties or reevaluation of your overdraft facility by the bank.

Q27. What is a no overdraft account?
Ans27. A no-overdraft account is a type of bank account that does not allow overdrafts, meaning you can only withdraw funds that are available in your account balance.

Q28. Is overdraft interest charged daily?
Ans28. Yes, overdraft interest is typically charged daily on the outstanding amount, so it’s crucial to manage your overdraft wisely to minimize costs.

Q29. What bank is best for an overdraft?
Ans29. The best bank for overdrafts varies based on individual needs, such as interest rates, fees, and service quality. It’s advisable to compare different banks and consult Kreditbazar for personalized recommendations.

Q30. What is the credit limit on CC?
Ans30. The credit limit on a cash credit account (CC) is the maximum amount that can be borrowed against the account. It is determined by the bank based on the borrower’s financial profile.

Q31. Which is better, CC or OD?
Ans31. The choice between a cash credit (CC) and an overdraft (OD) depends on the borrower’s needs. Cash credit is typically more suited for businesses, while overdrafts can be beneficial for personal finance management.

Q32. What is BG in banking?
Ans32. BG, or Bank Guarantee, is a financial instrument provided by a bank, ensuring that the liabilities of a debtor will be met if they fail to fulfil their contractual obligations.

Q33. What is LC in the bank?
Ans33. LC, or Letter of Credit, is a document issued by a bank guaranteeing payment to a seller on behalf of the buyer, provided that the seller meets the specified terms and conditions.

Q34. What is LC and BG?
Ans34. LC (Letter of Credit) and BG (Bank Guarantee) are both financial instruments used to facilitate transactions and reduce risk in trade. They assure payment and performance under specified conditions.

Q35. What is PBG?
Ans35. PBG, or Performance Bank Guarantee, is a guarantee issued by a bank to ensure that a contractor completes a project as per the terms of the contract.

Q36. What is a salary overdraft?
Ans36. A salary overdraft is a type of overdraft facility offered to salaried individuals, allowing them to withdraw more than their account balance based on their salary income.

Q37. What is the interest rate on the OD limit?
Ans37. The interest rate on the overdraft limit can vary widely depending on the bank or NBFC, typically ranging from 12% to 24% annually. It’s essential to compare rates to find the most suitable option for your needs.

Q38. What is the main purpose of an overdraft?
Ans38. The main purpose of an overdraft is to provide individuals and businesses with immediate access to funds for unexpected expenses or cash flow issues without the need for a formal loan application.

Q39. How many types of overdrafts are there?
Ans39. There are primarily two types of overdrafts: secured overdrafts (backed by collateral) and unsecured overdrafts (based on creditworthiness).

Q40. Which bank has the highest overdraft limit?
Ans40. The bank with the highest overdraft limit varies based on individual circumstances, such as creditworthiness and income. It’s advisable to check with multiple banks and consider Kreditbazar’s options for the best deals.