Overdraft Facility in India: How It Works & Types
Last verified: June 2026, against RBI norms and standard lending practice. Rates, LTV and terms vary by lender and change — confirm current terms before borrowing. General information, not financial advice.
An overdraft (OD) lets you withdraw more than your account balance up to a sanctioned limit — and you pay interest only on what you actually use. It’s a flexible way to handle short-term cash gaps.
How an overdraft works
The bank sets an OD limit; you can draw from it as needed, repay, and draw again (revolving). Interest is charged only on the amount used, for the days used — not on the full limit. That makes an OD cheaper than a term loan for short, uncertain needs.
Types of overdraft
- Against fixed deposit: borrow against your FD (often up to ~90% of it) at a low rate, without breaking the FD.
- Against salary: some banks offer a pre-set OD to salary-account holders.
- Against securities/property: higher limits secured by shares, mutual funds or property.
- Unsecured OD: based on your profile, at a higher rate.
Overdraft vs personal loan
A personal loan gives a lump sum repaid in fixed EMIs with interest on the whole amount. An OD gives a flexible limit with interest only on usage — better when you need funds on and off rather than one lump sum. For a lump-sum need, a term loan may be cheaper.
Costs to check
Interest rate, processing/renewal fee, and any minimum-usage charges. An OD against your own FD is usually the cheapest form. Don’t treat the limit as free money — it’s debt, and interest adds up if you stay drawn for long.
Worked example
A ₹5 lakh overdraft against an FD earning 7% might charge about 8–9%. If you use ₹2 lakh for two months, you pay interest only on ₹2 lakh for those two months — roughly ₹2,800–₹3,000 — while your FD keeps earning. Breaking the FD instead could cost you a premature-withdrawal penalty and lost interest.
When an overdraft beats a personal loan
For short, uncertain cash needs, because you pay interest only on what you use. For a fixed, longer need, a personal loan’s fixed EMI and lower risk of “rolling” debt can be better. Avoid using an overdraft as a permanent extension of income.
Reviewed October 2026. Card and product terms change — confirm current details with the provider.
FAQs
Does an overdraft affect my credit score?
Secured overdrafts are reported as credit facilities; using them responsibly doesn’t hurt, but missed interest payments do.
Do I pay interest on the full overdraft limit?
No — only on the amount you actually use, for the days you use it.
What is an overdraft against FD?
Borrowing against your fixed deposit (often up to ~90%) at a low rate, without breaking the FD.
Overdraft or personal loan?
OD suits flexible, on-and-off needs; a personal loan suits a one-time lump sum repaid in EMIs.