An Overview of Personal Loan Overdraft (OD) Facility

What is a Personal Loan Overdraft Facility?

A personal loan overdraft (OD) facility is a type of credit line provided by banks and financial institutions that allows borrowers to withdraw funds as and when required, up to a pre-approved limit. The borrower is charged interest only on the amount withdrawn, not on the entire sanctioned limit.

This facility is often linked to a borrower’s existing bank account or a separate OD account. It works much like a credit card or a current account overdraft, but with the benefit of relatively lower interest rates and greater loan amounts.

Example:

Suppose your approved OD limit is ₹5 lakhs. You withdraw ₹1 lakh for emergency medical expenses. Interest will be charged only on the ₹1 lakh until you repay it, not on the entire ₹5 lakh.

Key Features of Personal Loan OD Facility

1. Flexible Withdrawals

You can withdraw funds as needed, in full or in parts, based on your cash flow requirements. There's no need to take the entire loan amount in one go.

2. Pay Interest Only on Usage

Unlike regular personal loans, where interest is charged on the full loan amount, OD facilities charge interest only on the amount you actually use.

3. No Fixed EMIs

Repayments are not tied to fixed EMIs. Borrowers have the option to repay the principal partially or fully at any time, along with the interest due.

4. Revolving Credit

The OD facility is usually revolving in nature, meaning once you repay the withdrawn amount, the available limit is restored, and you can use it again without reapplying.

5. Tenure

The tenure can range from 1 to 5 years and is usually renewable depending on the borrower’s repayment track record and the lender's policies.

Benefits of Using a Personal Loan OD Facility

✅ Emergency Fund Access

It acts as a safety net for unexpected expenses such as medical emergencies, sudden travel plans, or temporary cash shortfalls.

✅ Improved Cash Flow Management

Ideal for self-employed individuals or professionals with irregular incomes. You only use what you need and repay as income comes in.

✅ Cost-Effective

Since interest is charged only on the utilized amount, it can be more economical than a traditional personal loan if managed wisely.

✅ Prepayment Flexibility

No penalties for early repayment or partial repayments, offering more control over debt management.

How is it Different from a Traditional Personal Loan?

Eligibility and Application

Eligibility for a personal loan OD facility depends on several factors, including:

• Credit score (usually 700+ is preferred)
• Stable income (salaried or self-employed)
• Existing banking relationship
• Repayment capacity and debt-to-income ratio

Many banks offer this facility to existing customers, especially those with salary accounts or high transaction volumes.

Application Process:

1. Check Eligibility: Use online tools or visit your bank to check eligibility.
2. Submit Documents: Provide income proof, ID, address proof, and bank statements.
3. Credit Assessment: The bank evaluates your repayment capacity and sets a limit.
4. Approval and Setup: Once approved, the OD account is linked and ready for use.

Points to Remember

• Interest rates may be slightly higher than secured loans but are competitive compared to credit cards.
• Non-payment or irregular payments can impact your credit score.
• Some banks may charge maintenance or renewal fees annually.
• Misuse of the revolving credit could lead to debt accumulation if not managed wisely.

Conclusion

The personal loan overdraft facility offers a smart and flexible borrowing solution for individuals who value control over their finances. Whether you're a freelancer with variable income, a small business owner needing working capital, or someone who wants a cushion against emergencies, this facility can provide both convenience and peace of mind.

However, with flexibility comes responsibility. Borrowers must exercise discipline in withdrawals and repayments to make the most of the benefits this facility offers. By understanding the terms, monitoring usage, and planning repayments, you can harness the power of the personal loan OD facility effectively.