Definition
Overdraft
An overdraft is a credit facility that lets you withdraw more money than you have in your account, up to an approved limit.
An overdraft (OD) allows you to spend beyond your account balance up to a sanctioned limit, with interest charged only on the amount and period you actually use — not the whole limit. It can be secured against an FD, salary, property or shares, or unsecured for some customers.
It offers flexible short-term liquidity, and because interest is charged on usage, it can be cheaper than a regular loan for irregular, short-duration borrowing. Repaying quickly reduces the interest cost.
An OD against an FD typically lets you borrow a high percentage of the deposit value while the FD keeps earning interest, making it a convenient alternative to breaking the deposit.
Related terms
- CASA (Current and Savings Account)CASA refers to the combined balances in current and savings accounts, which are a bank's cheapest source of funds.
- Loan Against Property (LAP)A loan against property is a secured loan where you mortgage residential or commercial property to raise funds for any purpose.
- Sweep-in Fixed DepositA sweep-in FD links a savings account to a fixed deposit so surplus funds auto-move to earn FD interest, and reverse-sweep back when the account needs money.
Plain-English explainer from The Dispatch Investors Encyclopedia. General information, not financial advice.