Key takeaways
- You pay interest only on the amount you use, for the days you use it.
- It is flexible for short-term cash needs but can be costly if you stay overdrawn.
- Overdrafts can be secured against FDs, property, securities, or offered on a salary account.
What it is
An overdraft (OD) is a credit limit linked to your bank account. You can withdraw beyond your balance up to the limit, and when money comes in, it reduces the amount owed. Unlike a term loan, there are no fixed EMIs, and the limit is reviewed periodically.
Common types
- Against a fixed deposit: low rate, because your FD is the security.
- Against property or securities: larger limits for businesses and individuals.
- Salary account OD: a small pre-approved limit for salaried customers.
- Business OD / cash credit: to manage working capital.
How interest is charged
Interest is calculated daily on the amount you owe. For example, if you use ₹2,00,000 for 10 days at 12% a year, interest is about ₹2,00,000 × 12% × 10 ÷ 365 ≈ ₹658. Estimate yours with the overdraft calculator.
OD or term loan?
- Choose an overdraft if your need is short and the balance goes up and down.
- Choose a term loan if you need a fixed amount for a long time and want a predictable EMI. See working capital vs term loan.
Watch for
- Processing and renewal fees, and charges if you exceed the limit.
- A minimum utilization requirement, in some cases.
- The temptation to stay overdrawn. A permanent OD balance behaves like an expensive loan.
This article is for general information only and is not financial, legal or tax advice. Interest rates, fees and rules change, so confirm current terms with the lender or the regulator before you decide. Examples use illustrative figures. Last reviewed: October 2026.
Leave a Reply