What Happens if You Overdraft Your Savings Account

Before you hit on the online savings bank account opening option, you must not just check the documents needed to open a bank account but also the offered financial services. Today, bank accounts come with a wide range of financial services. These include a passbook, chequebook, debit card, and other important features to manage and maintain your account such as mobile and internet banking facilities, virtual debit card, free home banking, and others. Besides this, a bank even offers an important financial service called the overdraft option.

Overdraft is a credit option where you can withdraw funds through your savings account or current account even if your balance is nil. In simple words, this is a short-term credit option that you must repay within the time period as specified by the bank along with interest. Discussed here is a guide on overdraft and how it functions.

What is the procedure for opting for an overdraft facility?

An overdraft facility offers you financial flexibility. With it, you can pay your expenditures in times of monetary mismatches. It can potentially help you avoid embarrassing scenarios and maintain a healthy corporate relationship.

To apply for the overdraft facility, you must provide a written application by approaching your bank directly. You can also activate the overdraft facility through online mode. Your bank may either accept or turn down your application for this feature based on the assessment of your repayment potential. If you have a Kotak savings and current account, you can opt for the Smart Overdraft option that links both your accounts to allow you to overdraw on your savings account.

What are the important features of the overdraft option?

• Approved bank credit limit

Overdraft is offered based on a predefined limit. This credit limit may be different for every borrower.

• Rate of interest

The interest rate is levied on the amount you avail as a loan. The interest rate is computed on a daily basis and is billed to your account by the end of the month. In the case you default in making the payment of the overdraft amount according to the set schedule, the interest constituent will be added to your principal component by the end of the month and interest will be charged on your new principal constituent.

• Zero prepayment fee

Whenever you prepay a loan, generally a prepayment fee is charged. However, this charge is not levied in the case of the overdraft option. Also, in the case of an overdraft facility, you need not require repaying the borrowed amount in the form of Equated Monthly Instalments (EMIs). You can simply repay the outstanding due on your overdraft in your current or savings account cumulatively.

Ending note

The overdraft option is one of the prudent routes for you to get money when you need it urgently. You can opt for flexible repayment tenures and modes to make the repayment of the amount borrowed through the overdraft facility. However, before you open a bank account to avail this facility, you must understand all the features linked with the overdraft option and then proceed with it.