What is Overdraft? Characteristics of overdraft

Overdraft or full name is called an Overdraft Line of Credit means that a credit institution allows a customer to overspend the amount on the customer’s checking account to a certain limit and in a certain time.

What is overdraft?

Overdraft is a loan operation in which a bank allows a borrower to exceed his / her current balance of payment to a certain limit.

This limit is called the overdraft limit.

what-is-overdraft

Overdraft is the credit extension of the bank to customers when the checking account returns to 0.

Overdrafts allow the account holder to continue withdrawing even if the account has no funds in it or there is insufficient funds in the account to cover the withdrawal amount.

In other words, overdrafts occur when there are more withdrawals from the bank account than from existing accounts.

This creates a negative balance on the account and means the bank has given us a credit.

See also: What is debt? What is bad debt?

Conditions for being granted overdraft

  • Customers must be reputable
  • Regularly transact via banks
  • Have a stable financial status
  • Have regular income and short income cycle.

Characteristics of overdraft operations

  • Overdrafts are usually short-term credit operations. When borrowing, the bank and customer will agree on a certain limit and the time to use the overdraft limit.
  • Customers can overpay the balance of the current payment but within the overdraft limit. Within the scope of the granted overdraft limit, when in need, the customer will be actively used on the current account through the issuance of checks or appropriate payment methods.
  • Most are not guaranteed.
  • Overdraft operations are usually issued to customers to use to pay salaries, payables, and buy goods.
  • To ensure the reduction of risks, overdraft lending is usually only applied to customers who ensure the ability to repay debts to banks. The bank often relies on the amount of money on customers’ accounts to review borrowers and determine overdraft limits.

Objective of overdraft

To compensate for the temporary deficit in payment of customers to pay for reasonable and valid expenses that are allowed to lend to banks.

Overdraft lending is a very flexible lending method, creating favorable conditions for customers to use loan money.

Types of overdraft

Overdraft loan has 2 main forms: unsecured loan overdraft (no mortgage) and mortgage overdraft.

Mortgage Overdraft: You need collateral (usually a savings account). The mortgage overdraft limit depends on the value of your collateral. Some banks has an extremely convenient form of an overdraft loan, a mortgage for a savings account and low interest rates, suitable for the need of money urgently without wanting to close the savings account.

Unsecured loan overdraft: That is, there is no need for collateral. Based on your credit history, the bank may pre-approve a line of unsecured Online overdraft loan. This limit is usually about 3-5 times your salary.

See also: Robocash online loan – How to get cash in 15 min with 0% interest rates

Should I have overdraft loan?

Overdraft loan is suitable for cases of urgent need of money to spend in a short time when the salary is not available. With bank, you have registered to open an overdraft but if you do not spend it, you will not lose interest, helping you to be fully active in cases of urgent need of money.

If you are a person who has a habit of overstretching and do not know how to control spending, you should consider carefully before using overdraft as well as other consumer loan products. It is essential when borrowing from a bank that you need to ensure your ability to pay before borrowing, so that you do not fall into a salary situation just to pay off debt.

Together with a number of reputable banks today, banks are providing its customers with full online overdraft registration (via Internet Banking, Mobile Banking). After customers successfully register to open overdraft on bank, within 30 minutes, the advance will be transferred to the customer’s account.

Referrence: Unused Bank Overdrafts: Their Implications for Monetary Analysis and Policy

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