In today’s world of changing financial needs, flexibility in managing short-term funds is important. That’s where the overdraft loan comes in. An overdraft loan is a convenient facility that allows account holders to withdraw money from their bank account even when the balance is zero or below. With simple rules and a focus on short-term needs, overdraft loans have become an essential financial tool for both individuals and small businesses.
This guide will help you understand what overdraft loans are, how they work, when they should be used, and how various banks in India offer them. By the end of this article, you’ll have a solid understanding of overdraft loans, and whether they suit your needs.
What is an Overdraft Loan?
An overdraft loan is a credit facility provided by banks that allows customers to withdraw more money than they have in their accounts. It acts as a short-term loan with a limit fixed by the bank. The interest is charged only on the amount you use, not the entire sanctioned limit.
The beauty of an overdraft loan lies in its flexibility. Unlike regular loans, you don’t need to take the full amount at once. You can withdraw, repay, and withdraw again as long as you stay within your limit.
Key Features of Overdraft Loans
Here are some main features that make overdraft loans an attractive option:
- Flexible Usage: Withdraw money only when needed.
- Interest on Utilization: Interest is charged only on the amount used and for the days used.
- No EMI Pressure: There are no fixed monthly repayments.
- Quick Approval: Existing account holders often get instant approval.
- Security Options: Available as both secured (against FD, insurance, property) and unsecured loans.
Types of Overdraft Loans
Banks offer different types of overdraft loans based on the collateral and user profile:
| Type of Overdraft Loan | Description |
|---|---|
| Secured Overdraft | Backed by Fixed Deposits, LIC policies, or other assets. |
| Unsecured Overdraft | No security needed; offered based on credit score and relationship. |
| Business Overdraft | Offered to business accounts for working capital needs. |
| Salary Overdraft | Linked to salary accounts with fixed limits, typically 2-3 times salary. |
Benefits of Overdraft Loans
Understanding the benefits of overdraft loans can help you decide if this option fits your financial strategy:
- Convenience: Immediate access to cash when needed.
- Interest Savings: Pay interest only for what you use.
- No Prepayment Charges: You can repay early without any extra cost.
- Useful for Emergencies: Ideal during sudden expenses or low-cash months.
- Credit Score Boost: Timely repayments can improve creditworthiness.
Interest Rates on Overdraft Loans in India – 2025
Below is a table with current overdraft loan interest rates offered by leading Indian banks. These rates may vary depending on your credit profile, relationship with the bank, and type of collateral:
| Lender | Rate Range | Fixed / Floating | CIBIL Tiers | Women / Special Discounts | Product Features & Limit |
|---|---|---|---|---|---|
| Kotak Mahindra Bank | From 12.75 % p.a. | Floating | Requires CIBIL ≥ 730 | None | Personal Loan Overdraft, Digi OD, Smart OD: ₹50k–₹40L; 1–5 yr tenure; interest only on used amount; processing ₹ up to 3% |
| ICICI Bank | ~Repo+X (secured FDs) | Floating (FD-linked) | Not linked to CIBIL (“secure via FD”) | None | FD Overdraft: no processing/prepayment fee; interest at FD rate +1% |
| HDFC Bank | ~0.05% per day (~18% p.a.) | Floating | Not CIBIL-linked; based on business account history | None | Dukandar OD for shopkeepers/SMEs: up to ₹10L; no collateral; zero commitment on unused limit; minimal docs |
| Axis Bank | From ~10.75% p.a. | Floating | Not CIBIL-linked | None | Cash Credit/Overdraft: for current account holders; standard bank charges apply |
| IDFC First / NBFCs | 10.50%–25% p.a. | Floating | Usually credit-based, not fixed tiers | None | Offers tailored MSME overdraft; variable limits and quick digital onboarding |
🔍 Key Highlights
- Interest Rates
- Lowest starting rate is Kotak’s 12.75% p.a. for personal OD.
- HDFC’s Dukandar OD offers approx. ₹0.50/day per ₹1k (~18% p.a.) with no unused commitment charges.
- IDFC First / NBFC overdrafts start around 10.50%, based on eligibility .
- Rate Structures
- All overdrafts use floating interest, with daily accrual only on utilized funds—no fixed EMIs.
- CIBIL Considerations
- Kotak requires a minimum score of 730 for eligibility.
- Other lenders base approval mostly on account history or collateral, not credit scores.
- Women & SME Benefits
- HDFC Dukandar OD is designed for small businesses (e.g., women-led kirana stores), offering no collateral and easy access.
- No explicit gender-based discounts, but SME overdrafts are tailored for small business owners.
- Product Features & Access
- Kotak: Digital salary-linked ODs with 1–5-year tenure.
- ICICI: Secure OD against FDs at FD rate +1%, no fees.
- Axis Bank: Overdraft facility linked to current account/Cash Credit, includes regular charges.
- NBFCs: Instant collateral-free MSME ODs with remote onboarding options.
🧭 Which Overdraft Suits You Best?
- For salaried individuals needing flexible credit under ₹40 L: Choose Kotak for its digital access and fair starting rate (~12.75%).
- If you hold an FD and want liquidity without breaking it: Opt for ICICI FD Overdraft—interest = FD rate + 1% with zero fees.
- As a small business owner (kirana/shop): HDFC Dukandar OD is ideal—no collateral, minimal paperwork, daily interest.
- Need MSME business financing quickly: Explore IDFC First / NBFC overdrafts—with streamlined digital processing.
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Eligibility Criteria for Overdraft Loans
Banks generally follow these eligibility rules for granting an overdraft loan:
- Age: 21 to 65 years
- Income Proof: Salary slips or ITR for self-employed
- Existing Bank Relationship: Most OD loans are offered to existing account holders
- Credit Score: 650 or higher for unsecured overdrafts
- Collateral: Required in secured overdraft options
How to Apply for an Overdraft Loan
Here’s a quick step-by-step process:
- Visit Bank or Apply Online: Most banks offer digital applications for overdraft loans.
- Submit Documents: Identity proof, address proof, income proof, and bank statements.
- Choose Limit: Based on your requirement and eligibility.
- Approval & Activation: Usually takes 24-72 hours.
- Withdraw Funds: Use funds via ATM, cheque, or online transfer.
Who Should Consider an Overdraft Loan?
An overdraft loan is ideal for:
- Salaried Individuals: To meet temporary shortfalls before payday.
- Small Business Owners: To manage cash flow between receivables and payments.
- Professionals: Like doctors, lawyers, or consultants facing seasonal income patterns.
- Freelancers: Who may not have fixed income every month.
Tips for Managing Overdraft Loans Wisely
- Use it only when needed to avoid unnecessary interest.
- Keep track of your usage via online banking.
- Repay frequently to reduce interest burden.
- Avoid maxing out the limit, which may affect credit score.
- Review terms annually, especially in business overdrafts.
Difference Between Overdraft Loan and Personal Loan
| Feature | Overdraft Loan | Personal Loan |
|---|---|---|
| Repayment Type | Flexible, no EMIs | Fixed monthly EMIs |
| Interest Calculation | Daily on used amount | Monthly on full amount |
| Withdrawal | Anytime within limit | Full disbursement only |
| Prepayment Penalty | Usually none | May be applicable |
| Purpose | Short-term cash needs | Planned big expenses |
FAQs
A. An overdraft allows you to withdraw more money from your bank account than your current balance, up to a pre-approved limit. Interest is charged only on the amount used, making it different from fixed-term loans.
A. Overdraft is a flexible credit line tied to your bank account with daily interest and no EMIs. A personal loan is a fixed amount with EMI repayments and interest on the full sum.
A. Most overdrafts have floating interest, calculated daily on the outstanding balance. Some are linked to base rates like MCLR or repo.
A. In India, overdraft rates typically range from 8% to 24% p.a., depending on the bank and your credit profile.
A. You generally need a good credit score, steady income, and a bank account. Some secured overdrafts may require collateral like an FD, property, or investments.
A. Yes, some schemes like overdrafts against FDs, salaried, or business accounts offer better terms to women or small enterprises. Public programs like Jan Dhan OD also exist.
A. Interest is calculated on the daily outstanding. No fixed EMIs; you can deposit funds anytime to reduce interest charge.
A. Yes, there is no prepayment penalty. You can repay part or all of the borrowed amount whenever you want.
A. If used responsibly and repaid timely, it can improve your credit score. Defaults or overuse can harm your profile.
A. Overdrafts are typically short-term credit, often up to 12 months, but can be extended to 24–60 months under certain schemes.
A. Yes—if you need quick, small amounts for a short time, overdrafts are convenient compared to term loans.
A. Yes, some banks/NBFCs offer small unsecured overdraft limits, especially linked to salary accounts. Larger limits usually need collateral.
Conclusion
An overdraft loan is a powerful financial tool that gives you control and flexibility. Whether you’re a salaried professional or a business owner, it allows you to manage short-term financial needs without pressure. With proper usage, it not only fills cash flow gaps but also helps build a good credit history.
Make sure to check interest rates, terms, and repayment features before opting for one. Like any loan, responsible usage is key to making the most of your overdraft facility.