Overdraft Facility is a financial instrument in which you can withdraw money from your savings or current account, even if your account balance is zero. This feature is provided by almost every financial institution, including banks and NBFCs. It’s a type of short-term loan to be repaid in defined tenure as required by the financial institutions. Lenders shall levy interest rate that the borrower needs to repay, as per the bank’s terms and conditions. The type of interest rate offered by lender is fixed and not floating.
As aforementioned, borrowing through overdraft is just like borrowing a loan from the bank or NBFC. Some customers are pre-entitled to avail the overdraft facility by the lender while some have to take approval. When the pre-entitled customers withdraw extra money from their account, their account balance becomes negative and the overdraft facility is activated automatically.