Consumer spending in India has seen a sharp increase over the years. As per reports, it has jumped from Rs.18 trillion at the end of Q1 2017 to more than Rs.21 trillion by Q1 2021. To keep up with the escalated expenses, Individuals often have to rely on other financial means besides their earnings.
Personal loans with an overdraft facility are a common choice for individuals in need of liquidity. These are specialized forms of credit curated for eligible and creditworthy candidates. However, when contemplating such loans, individuals must consider a few aspects beforehand.
Overdraft on a personal loan – 5 important things to remember
Listed below are some of the crucial aspects of an overdraft facility that one must understand, starting from its definition to interest charges and more.
- Defining overdraft facility
Financial institutions offer a lump sum amount to the borrower during disbursal in a standard loan or form of credit. This debtor then pays interest on the entire amount regardless of whether he/she uses only a portion of it or utilizes it in its entirety.
An overdraft facility on loan means that a pre-sanctioned amount is deposited into a borrower’s account. He/she can withdraw from this disbursed sum as and when necessary. However, rather than bearing interest on the entire approved amount, individuals need only service interest on the principal amount utilized or withdrawn.
For example, a lender disburses Rs.5 lakh into such an overdraft account. The borrowing individual decides to withdraw Rs.1 lakh from this sum and leave the remaining amount untouched.
In such a case, an overdraft facility would result in the borrower paying interest on only the Rs.1 lakh he/she utilized instead of the full principal amount. Such a feature not only allows a short-term personal to help during financial emergencies but also eases the burden of repayment.
- Eligibility criteria
Eligibility parameters tend to differ between the various lenders operating in India. Nevertheless, the three most important criteria include credit score, monthly income, and age of the borrower. CIBIL score of 750 or more is mandatory across most financiers today. If one’s rating is below this level, he/she can take several steps to improve his personal credit score. For instance, paying existing dues on time and avoiding delinquency is the easiest way to build one’s credit score, thereby fulfilling personal loan eligibility criteria.
Income is also a key determinant when applying for loans with an overdraft facility. A lender must be convinced that an individual opting for such a form of credit will be able to repay it without facing tremendous financial strain. Most NBFCs list a minimum monthly income requirement that applicants must meet.
Lastly, the age bracket is also listed as a parameter to fulfill when availing of the loan. Generally, individuals aged between 20 and 60 can apply, although this differs from one lender to the next.
- Repayment and tenor of overdraft facility
A personal loan offers considerable flexibility in choosing a preferred tenor. The same is true for any dues through an overdraft facility. Individuals will need to bear interest and repay through EMIs on the utilized amount during the entire tenor. As long as the borrowed amount is repaid, the initial sanctioned amount is restored once again.
For example, if one borrowed Rs.1 lakh from Rs.5 lakh disbursal, his/her available credit amount would drop to Rs.4 lakh. However, as soon as this borrower repays the Rs.1 lakh along with interest, his credit balance will return to Rs.5 lakh from Rs.4 lakh.
The ability of repeated borrowings and repayments present individuals a unique opportunity to improve their CIBIL score for a personal loan using proper financial planning.
- Customized offerings can reduce application hassles
Potential borrowers must look for specialized offers from lenders tailored to their specific needs. For instance, Bajaj Finserv provides pre-approved offers to streamline the lending process significantly. Such offers can ease application across financial products, such as personal loans, business loans, and more. Check your pre-approved offer by submitting contact details and name.
Keep in mind that such offers are extended to individuals who enjoy a healthy credit rating. In some cases, only existing customers of a lending institution can look forward to such customized terms.
- Source of continuous cash flow
Both individuals and businesses suffer from a cash flow deficit at certain periods. Knowing how to apply for a personal loan with an overdraft facility resolves such cash shortages effectively. It acts as a backup or contingency plan during financial emergencies.
With personal loans showing an 11.9% growth YoY in June 2021, one can safely assume that the overdraft facility is also set to witness increased popularity. Nonetheless, comparison and research are crucial when applying for such credits to acquire the best terms. Borrowers must utilize online tools, such as EMI calculators, to ensure optimal benefits. Consumer spending in India has seen a sharp increase over the years.
