Want a loan? 7 things you should know about salary overdraft

They say there is a loan for everything under the sun. In fact, banks give you a special type of loan which you get based on a salary account you hold with the bank. This loan is is a revolving line of credit based on your salary with the bank account. To know more read on.

1) Salary overdraft:

As the name suggests, it’s is an overdraft facility which your bank gives on your salary savings account. Overdraft facility simply means that you can withdraw a certain amount over and above the balance in your account.

2) Loan amount:

Most banks give you a credit line of up to 3 times of your net monthly salary. So if you monthly salary is Rs 1 lakh, you could get an overdraft credit of Rs 3 lakh. But, keep in mind that not all banks that give me as a fixed amount, each bank have its own eligibility parameters to determine the amount of overdraft they give. The amount is in the range of Rs 1 lakh to as high as Rs 5 lakh. Some banks give a much smaller amount, say 90 percent of your net monthly salary. With some banks, you can withdraw a minimum set limit.

3) Cost:

The rate of interest varies from bank to bank and can be in the average range of around 1.3 percent to 2.5 percent per month. Banks calculate the interest on a daily basis and charge you on a monthly basis. Keep in mind that you will need to pay interest only for the amount you use and for the period you used it for. Some bank may charge a fee to set such a facility, usually a few hundred rupees. And, like all loans you will also have to bear a processing fee of few hundred rupees. If you are late to pay the dues on time, you would be charged a few hundred rupees as a late payment fee.

4) Repayment options:

Your bank will send a statement every month, informing the details of the amount which you need to pay as well as the due date for the amount. The interest part you will need to pay on the first of the month and the principal on the day of your salary.

The principal amount you need to pay is usually 5 percent of the total amount you have withdrawn. The remaining can be carried forward to the next month. The good part is that you don’t have to pay a prepayment penalty. So if you have cash, you can always pay it towards the principal amount.

5) When to take an overdraft loan:

Of course, in case of an emergency. You could also avail this loan to tide over a short-term financial need.

6) How to operate: You can withdraw the cash at an ATM or even shop using your debit card, online as well as offline. You can also write a cheque.

7) Things to keep in mind:

Use the facility only to meet a really dire financial necessity, that too for the short term. Otherwise, it could get you into the habit of depending on such easy credit. It’s ready money after all. And, if you abuse the facility, you could get into a debt trap.