Overdraft Facility for Salaried Employees: Complete Guide

Sudden, unexpected expenses often lead to borrowing decisions. Amid the different loans and credit options, overdraft facilities offer financial aid with great flexibility. Especially for salaried individuals with a certain income and specific expenses, flexible borrowing, like an overdraft, can be highly convenient. 

Overdraft facility for salaried individuals, also known as salary overdraft (OD), offers immediate access to funds with a personalised repayment option and the advantage of using and paying interest on only the capital required and utilised. 

This guide covers the following topics: what an overdraft facility for salaried is, how a salary OD operates, average interest rates, eligibility requirements, and whether it is preferable to a personal loan.

What is an Overdraft Facility for Salaried / Overdraft Loan for Salaried Individuals?

An overdraft facility for salaried employees is a revolving line of credit that is directly connected to their wage account. The borrower may, upon authorisation, withdraw more money than the existing account balance up to a predetermined overdraft limit. In contrast to conventional personal loans, you are not given a lump sum payment; rather, the bank maintains a flexible credit line available for use whenever necessary. An overdraft facility for salaried individual is beneficial because interest is levied just on the money you use and only for the time you use it.

This is often provided by banks as an unsecured overdraft facility for salaried individuals. That is why your creditworthiness, account history, and income details are typically what determine your eligibility and OD limit.

The basic function of a salary overdraft is to provide financial security. It is particularly helpful for managing unanticipated expenses, bridging pay credit gaps, or meeting fluctuating cash flow demands. For short-term liquidity requirements, the overdraft loan for salaried individuals is a wise alternative since it provides freedom and control.

How Does Salary OD Work?

It is essential to comprehend how a salary OD operates before applying for an overdraft facility for salaried individuals. The process involves:

1. The OD Limit is Approved

You must have a normal salary account with the bank to use an overdraft facility for salaried employees. When granting the overdraft limit for salaried persons, banks usually analyse your salary account overdraft facility history and general financial conduct.

The OD loan for salaried person can be determined by multiplying your net monthly wage by a limit set by the bank. For instance, depending on your wage profile and their internal policies, many banks can provide an overdraft against salary that is up to three times your monthly income.

2. Making Use of the OD Facility

Funds can be withdrawn using a variety of methods, including ATMs, checks, internet banking, and other methods authorised by the bank, after the overdraft facility for salaried employees has been approved.

Interest is only charged on the amount used and for the duration of the use. There is no interest charged if the overdraft loan for salaried individual is not used.

3. Repayment / Revolving Credit

It’s easy and versatile to repay a wage OD:

• The remaining overdraft against your salary account is immediately deducted when your wage is credited, bringing your overdraft limit for salaried back into place. For this purpose, several banks provide auto sweep services.
• Some banks also permit manual payments.
• A lot of OD schemes are renewed every year. The overdraft facility for salaried individual may be terminated if your salary credits and account behaviour are not up to par.

Interest Rates and Other Charges Overdraft Facility for Salaried

The interest rates on overdraft facilities for salaried vary by scheme and by bank. The following are some indicative ranges:

• Interest Rate: The interest rate offered depends on the income and credit profile of the borrowers, as well as the policies of the lender. The interest can start around 8% and go up to 30% or more.
• Processing Fees: Banks may charge a certain amount or a percentage of the borrowed amount as a processing fee.
• Renewal Fees: Certain banks charge renewal fees for extending the overdraft facility for salaried individuals for longer than a year.
• Late Payment Fees: Banks may levy a penalty for missed payment.

Is a Salary Overdraft Better than a Personal Loan? Pros and Cons

The decision between a salary overdraft and a personal loan depends on your financial circumstances, ability to make repayments, and objectives.

Benefits of an Overdraft Facility for Salaried

The following factors make overdraft a suitable option:

• Flexibility: You can borrow only what you need without taking a lump sum upfront.
• Interest on Use: You can pay interest only on the amount utilised.
• An Easily Accessible Credit Line: After repayment, the credit limit can be reinstated for subsequent usage.
• No Set EMIs: Repayments are flexible and may coincide with your salary cycle, in contrast to a personal loan.
• Fast Activation: Digital banking services add to the accessibility of funds.
• Affordable for Temporary Needs: Great for bridging minor liquidity gaps until the next paycheck credit.

Limitations of an Overdraft Facility for Salaried

The following drawbacks can make a personal loan a better option than an overdraft.

• Restricted Permitted Sum: The OD limit is often restricted (frequently a multiple of the monthly salary). A personal loan may be necessary to cover high costs.
• Cumulative Interest: Over the long term, the cost of OD interest might be equivalent to that of a personal loan.
• Risk of Overspending: The ease of overdraft against salary account might tempt users to make several withdrawals, which could result in debt traps.
• Less Appropriate for Long-Term Financing: Large one-time expenditures are best handled through personal loans with specified EMIs.

When a Personal Loan May Be Better Than an OD?

Even though an overdraft loan for salaried individual is flexible, it is not always the best option. A personal loan can be a better option under the following conditions:

• A sizable lump sum is necessary for things like weddings, house repairs, higher education, or significant medical emergencies.
• Predictable repayment is preferred; EMIs provide structure and budget clarity.
• Long-term finance is necessary.
• Large financing is needed for assets like a house or a vehicle.
• Financial discipline is not assured; if not managed properly, revolving OD may result in multiple loans.

Typical Eligibility Criteria for Overdraft Facility for Salaried

In India, a salaried person is typically eligible for an overdraft loan for salaried or salary overdraft if they meet the following requirements:

• Age: Typically between 23 to 65 years
• Stable Income: Consistent pay, dependable company, and pay deposited into a bank account; a lot of banks need proof of prior salary credits for three to six months.
• Minimum Income Requirement: Banks may have varied minimum standards, often around ₹25,000. 
• High Credit Score: A credit score of 700 or more helps with the approval rate.
• Healthy Account Activity: No defaults, delays, or overdue payments. 

Suitable Use-Cases for Overdraft Facility for Salaried

An overdraft loan for salaried or salary overdraft is perfect for scenarios like:

• Temporary cash flow shortages before receiving payment for your salary.
• Urgent liquidity needs and emergencies.
• Unexpected or recurring costs such as travel, automobile maintenance, or holiday expenditures.
• Reusable line of credit for people who have fluctuating monthly income (freelancers, commission-based workers, and so on).

Role of My Mudra in Availing Overdraft Facility for Salaried

For working individuals, My Mudra makes overdraft facilities easier to access. Here’s what My Mudra offers:

• Easy Comparison and Selection: Compare the overdraft facilities, interest rates, fees, and limits offered by different banks to identify the best-suited option.
• Streamlined Application: You can submit your application and upload documents in a few clicks.
• Transparency: There are no hidden charges. All terms and policies are communicated upfront.
• Advisory Assistance: We have experts to guide you whenever you need.

Wrapping Up!

An overdraft facility for salaried individuals is one of the most easily accessible and flexible credit options available. The freedom to use only the amount you need makes such loans a more affordable and practical choice.

Avail of a salary account overdraft facility, and take care of your financial needs with My Mudra.

Also Read:
- Best Overdraft Facilities For Salaried Individuals In India (Bank Comparison)
- How to Apply for an Overdraft Facility Online (Step-by-Step Guide)