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Overdraft Facility for Self-Employed Individuals

Submitted by admin on September 6th, 2024

Overdraft Facility allows an individual to borrow a certain sum of money for a fixed tenure, even if they do not have any savings in their account, and even when their account balance is zero. The interest rates for overdraft loans are fixed and do not keep changing, making it easier for self-employed individuals to pay back this amount.

Some banks and NBFCs grant these loans easily, since this type of loan is offered to some customers as part of a package service. However, individuals who have not purchased such products or packages need not worry as they too will be offered the overdraft facility. There are two types of overdraft, secured overdraft, for which collateral is placed before borrowing money and unsecured overdraft for which there is no collateral.

Features of an overdraft facility

Credit Limit: For every borrower according to their previous transactions and history of repayment, a credit limit is determined beforehand. Borrowers can borrow less than their credit limit, if they do not need that much money. This only makes the amount they have to pay back less.

Interest: When an individual borrow money from the overdraft loan amount, only then the interest is calculated and only on the amount that is borrowed. Since this interest is calculated daily, it can vary from one day to the next depending upon whether the amount is withdrawn at intervals or not. This interest usually adds up and at the end of the month if the loan amount is not paid back in full including the interest, it then gets added to the main borrowed amount and the interest for the next month is calculated.

No Prepayment charges and EMIs: In general when one borrows in the form of a loan, they have to pay in the form of EMIs, since most people are salaried employees and get a fixed sum every month. However, with overdraft loans, one does not need to pay the amount as EMIs and the amount can be paid as a lump sum. Furthermore, one does not need to wait till the end of the loan tenure to repay the amount. They can pay back however much they can and whenever they can within the repayment tenure. Therefore, it is ideal for self-employed individuals as their earnings keep fluctuating. If their earning dip in one month and increase in the next, they can pay in the month when they have increased income and avoid payment in the month when their income is low.

Joint accounts are eligible for overdraft: When two individuals are collaborating through their respective income generating skills and decide to form a joint account, if this account goes into overdraft, both account holder are responsible for paying the amount and not just the one who have borrowed from the overdraft facility.

In case you are planning on using a cheque when your account has low balance or is in overdraft, hoping that the amount will be covered through this amount. It might result in the cheque getting dishonoured, resulting in you account being fined for it.

To know more about what to do and what not to do when your account is in overdraft, get in touch with our financial experts at Arthavidhi.