Overdraft Facility For Pensioners: How Does It Work?

In this article, we will be discussing the overdraft facility for the pensioners, if you traverse the journey with us till the end you will be very well versed with the overdraft facility for the pensioners and how it works.

Let us start with the very basics. What is an overdraft facility? 

What is the overdraft facility?

Overdraft facility is a financial instrument which allows an individual to withdraw money from his savings and current account even when there is a zero balance. Thus, this facility is a saviour in time of emergency, when one is left with little or no funds. The fund can be used for a variety of purposes like a medical emergency, personal emergency or any other purposes. Almost all financial institutions, like banks and NBFCs, offer this facility to assist the individual in times of need.

Overdraft is a kind of short term loan which is to be paid by the account holder in a specific duration of time. Borrowers have to repay the principal and interest amount according to the terms and conditions of the bank.

Now that we have understood what overdraft facility is, let us decipher what the overdraft facility for the pensioners is.

Overdraft facility for the pensioners

Some banks offer the overdraft facility to the pensioners and which works similar to a typical overdraft facility. The overdraft facility for the pensioners is available to an individual when they withdraw pensions for the bank account. As most pensioners do not have any fixed source of income so, in case of emergency, it becomes a tad difficult for them to arrange funds. This overdraft facility serves the purpose of bridging the gap and providing financial assistance which can be used for any legitimate purpose.

How can one avail the overdraft facility?

Individuals can avail the overdraft facility by pledging any security with financial institutions; The security can be a house, insurance, policies, bank fixed deposit accounts, shares, bonds, etc.

What is the rate of interest levied on the overdraft facility for pensioners?

Rate of interest levied on any loan is of great significance as it can change the amount which one has to incur for using a particular credit option. Interest rate imposed on overdraft facility varies from banks to banks. While some banks calculate the interest on the amount withdrawn, other banks charge interest based on the reducing balance method. The sanctioned overdraft limit and the actual interest charged will also be influenced by the asset pledged.

What is the different type of Overdraft facility?

Overdraft facility is differentiated on the basis of security against which the Overdraft is availed. It can be of different types like:

1. Overdrafts against house 
2. Overdraft against equity
3. Overdraft against Debts
4. Overdraft against Fixed deposits
5. Overdraft against salary

Is overdraft facility is available any bank?

Yes, an overdraft facility is available in almost all the banks. However, an individual can only avail the pension overdraft facility from the bank when he has a pension account and FD account with that bank.

When should one rely on overdraft facility?

An Individual must rely on overdraft facility when he is facing a cash crunch of a less amount. As the interest on the Overdraft is calculated on just the amount is withdrawn it assists one saving the money to be paid on huge loans.

Do overdraft impacts one’s credit score?

Yes, Overdraft has a bearing on one’s credit score. Individual must make all the EMIs at before the due date to ensure the credit score remains stable.

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Overdraft facility is a credit instrument which provides an individual with an option to withdraw money from his saving and current account even when there is a zero balance. It is a short term loan which is to be paid by the account holder in a specific duration of time. Individuals have to repay the principal and interest amount according to the terms and conditions of the bank.

Features of overdraft facility

1. Almost all financial institutions, like banks and NBFCs, offer bank overdraft for pensioners.
2. The fund can be used for a variety of purposes like a medical emergency, personal emergency or any other legitimate purpose.
3. Pensioners can avail the overdraft facility by pledging any security with financial institutions.
4. The interest rate varies from banks to banks. While some banks calculate the interest on the amount withdrawn, other banks charge interest based on the reducing balance method. The sanctioned overdraft limit and the actual interest charged will also be influenced by the asset pledged.
5. Pensioners can only avail the pension overdraft facility from the bank when he has a pension account and FD account with that bank.
6. Overdraft impacts the credit score. Individual must make all the EMIs before the due date to ensure the credit score remains stable.