An overdraft (OD) is a standby credit facility that gives you instant access to short-term cash flow. Unlike a term loan with a fixed tenure, you can typically repay it whenever your cash flow situation improves and any amount you repay into the OD account can be withdrawn again as long as the total outstanding amount is within the OD limit. Thus it is also called a “revolving credit facility or standby credit”. Some lenders also call it "cash credit" or "line of credit".
An overdraft can be a valuable financing instrument to consider even when there is no immediate need, as interest is only charged when there is a drawdown. Having a standby credit on hand could be useful for those urgent times when you do not want to wait for your loan to be approved. However, interest for an overdraft tends to be higher than a term loan and is best used for short-term ad hoc needs.
There are 2 types of ODs – Secured and unsecured. Unsecured ODs are issued using largely your credit profile & income to determine your repayment ability, while secured ODs allow you to pledge collateral such as insurance (that has cash value), property, certain investments, and deposits etc as security and can be as high as 120% of the value of the collaterals depending on the lender and quality of the collaterals.
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