Unplanned expenses derail the best of us. A cash crunch can happen at any moment in life despite all the financial management. A personal loan helps to overcome emergencies, allows one to get access to the funds, repay them over a long period. We may need funds for a short duration as well. A personal loan might not be the best solution to such situations.
An overdraft loan helps to overcome short term borrowing without having to opt for a loan for every short term requirement. For instance, if you are running a home business that requires funds for a short duration, an overdraft loan allows getting access to funds as per the requirement with the flexibility to repay within a few days.
How Does it Work?
An overdraft loan lets an applicant withdraw more than the account balance from their current account. The overdraft loan is a one-time setup sanctioned by the bank based on the performance of the bank account. The borrower has to pay interest only on the amount utilised for the days used.
The interest on an overdraft loan is more than a personal loan. However, since it’s a short term loan, the Modus-Operandi is entirely different.
The Unplanned Expenses- Examples
- Avoiding Bouncing of Payment
At times there might be a payment from the current account that existing balance may not make it possible to make the payment. If the bank account does not have a sufficient balance, the overdraft loan still allows the deduction to go through as a short term loan by the bank. The account holder may make the payment as per their comfort. The interest is charged only on the amount utilised for the number of days.
- Working Capital Management
Businesses often face a working capital challenge. For instance, a small restaurant would like to prepare for the upcoming holiday season. However, it would need immediate funds to promote, create a festive menu and hire temporary staff. The restaurant will be able to repay once the festive season starts. An overdraft loan helps the restaurant to overcome such working capital needs. The restaurant can make the payments from their bank account by utilising the overdraft loan and repay in a few days when the business starts.
- Advance Payment for additional profits
Small businesses make additional profits by making bulk purchases and advance payments. An overdraft loan helps small businesses to make profits using bulk purchases. Borrowers can do the balance transfer as per their comfort. Bank charges interest only on the amount utilised for the number of days used.
Overdraft Loan- Advantages
- Pay only for what you use.
The borrower pays only for the amount of overdraft loan utilised for the number of days used.
- No Fixed EMIs.
The borrower can choose how much they want to repay and when. There are no fixed EMIs in an overdraft loan. The balance transfer is as per the convenience.
- Increasing Limit.
Banks increase the overdraft loan limits on satisfactory conduct and timely repayments, increasing the available credit line for businesses to use.