 For Daily Job Alert |
Join Our Whats App Channel |
| For Free Study Material |
Join Our Telegram Channel |
An overdraft facility allows you to write cheques or withdraw cash from your current account up to the overdraft limit approved. It is a short-term (usually up to 12 months) standby credit facility which is usually renewable on a yearly basis. It is repayable on demand by the bank at any time.
The overdraft limit is the maximum amount that you can overdraw. You pay interest only on the amount that you overdraw. Interest is calculated on the daily balance overdrawn and debited to the account monthly. Any unpaid amounts of interest are added to the overdrawn amount in the following month. The interest rate on an overdraft account is usually charged at a percentage over the bank’s prime lending rate, for example, Prime + 3% per annum.
Whatever amount you repay into the overdraft account can be withdrawn again as long as the total outstanding amount is within the overdraft limit granted. This is why it is called a “revolving credit facility”
An overdraft facility can be granted on a secured or unsecured basis.
A secured overdraft is one where you pledge an asset to the bank as security. The asset could include deposits in the bank, property or shares. If the bank stops your secured overdraft facility and you are unable to repay your debt, the bank has the right to sell your pledged assets to recover what you owe it. If the proceeds are not enough to recover your debt, you are still liable for the difference.
An unsecured overdraft facility is one where no assets are pledged as security. Under current laws, banks can only grant unsecured credit of up to four times an individual’s monthly income, if his annual income is at least S$30,000. This includes credit granted on credit cards and other unsecured credit facilities.
Advantages of an overdraft
- An overdraft is flexible – you only borrow what you need at the time which may make it cheaper than a loan.
- It’s quick to arrange.
- There is not normally a charge for paying off the overdraft earlier than expected.
Disadvantages of an overdraft
- If you have to extend your overdraft, you usually have to pay an arrangement fee.
- Your bank could charge you if you exceed your overdraft limit without authorisation.
- The bank has the right to ask for repayment of your overdraft amount at any time, although this is unlikely to happen unless you get into financial difficulties.
- Overdrafts may be secured against business assets.
- Unlike loans you can only get an overdraft from the bank where you maintain your current account. In order to get an overdraft elsewhere you need to transfer your business bank account.
- The interest rate applied is nearly always variable, making it difficult to accurately calculate your borrowing costs.
- Unutilised overdraft facilities may be reduced by the banks at short notice, although this is unlikely to happen unless you get into financial difficulties.
