The interest rate on an overdraft account is calculated on the withdrawn amount from the total sanctioned limit. In other words, you pay interest on only the funds you borrow. So, if your overdraft limit is Rs. 80,000 but you have used Rs. 50,000, interest will be applicable on this used sum. OD interest rates can vary from bank to bank depending on factors like internal policies, current/savings account balance, OD amount required, and existing relationship with the lender.
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Features of overdraft account
- Eligibility: Generally, an OD facility can be availed by anyone with a bank account (savings/current/salary) with the lender. However, banks may have specific age and income criteria in place.
- Approved credit limit: Each overdraft account has an approved credit limit, which varies depending on your creditworthiness, monthly income, and the bank’s policies.
- Interest charges: Unlike other loan products, where the interest is charged on the entire sanctioned sum, interest in an overdraft account is charged only on the amount you borrow from the sanctioned limit. While the rates vary from one bank to the next, interest is calculated on a daily basis.
- Repayment structure: OD repayments do not follow an EMI payment structure generally used for loans. Instead, you have the flexibility of repaying the sum depending on your cash flow. Lenders can also grant extensions based on the customer’s account value, credit score, and repayment history.
- Weekly limit: As per the latest RBI guidelines, the weekly overdraft limit for banks has been increased to Rs. 1,00,000. This rule applies to current accounts as well as cash credit accounts.
- Free prepayment: Generally, lenders do not levy a prepayment charge on OD accounts.
- Joint OD facility: If you have a joint account with an OD facility, you and your co-account holder are responsible for the debt, regardless of who uses it. In other words, if one borrower defaults on the OD account, the other account holder may have to repay the debt.
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