Understanding Bank Overdraft Accounts and When to Use Them

Understanding Bank Overdraft Accounts and When to Use Them

An overdraft account is a type of credit facility offered by banks that allows account holders to withdraw more funds than they have in their account. For instance, you can write a cheque for Rs. One lakh from an account with zero balance. This article will delve into the appropriate scenarios for using an overdraft account.

Overdraft accounts can be set up against fixed deposits (the most common method), property, or income. Typically, you can borrow up to 75% of the fixed deposit amount. The interest rate for borrowing is usually 1% higher than the fixed deposit rate. The borrowed amount can be withdrawn in installments, and interest payments start immediately.

Author's Note: This article is written by a commissioned writer from the financial services industry. The views expressed here are personal and do not necessarily reflect those of freefincal.

Disclaimer: Personal finance is highly individualistic, and the utility of an overdraft varies depending on one's profession, life stage, net worth, etc. Businessmen, investors, and traders should consider using an overdraft account if they are confident of earning more than the interest they pay.

I have observed many successful businessmen who keep their entire working capital as a fixed deposit, take an overdraft against it, and run their operations through the overdraft account. Personally, I have followed a similar strategy, using my capital as a fixed deposit and an overdraft for monthly expenses and card payments.