OD Interest Rate: Features and Calculation

OD Interest Rate: Overdraft Account Fees, Charges and Calculation

Did you know that the interest rate on an overdraft (OD) facility against a savings account is capped at just 2% above the base rate?

What’s more, you can also avail overdraft facilities against fixed deposits, salary accounts, insurance policies, and even property, giving you flexible access to funds when you need them most.

Before opting for an OD, take a moment to understand its interest rates, features, and different types. This knowledge can help you borrow smartly and make confident financial decisions.

Quick Synopsis

• OD interest rates are variable and may change based on the bank’s policies.
• The overdraft interest rate applies to the amount utilised.
• OD limits differ across banks, depending on eligibility and collateral.

Understanding OD Interest Rates

Overdraft Interest rates are based on the type of loan you have availed. It also depends on the collateral, bank or loan provider and the period of overdraft loan. Find out all about OD interest rates below:

Variable OD Account Interest Rate

The OD interest rate can change from time to time, making it variable. It changes based on the bank's policies and market conditions. Further, overdraft interest rate changes are subject to the Central Bank's lending rates, risk assessment by the bank and the economic condition. 

Annual Percentage Rate

The annual percentage rate (APR) is the cost of borrowing for an overdraft. This includes the interest as well as additional fees. You can compare an overdraft with other forms of credit using the APR. 

Fees and Charges

Certain banks might levy additional fees and charges in addition to interest if you avail an overdraft facility. These fees might include annual fees, transaction fees and maintenance fees. As a result, before you avail an overdraft facility, ensure you are aware of the fee structure of the bank. 

Credit Limit and Risk Assessment

Your OD interest rate might vary based on your credit limit and creditworthiness. If you have a good credit history, you might get an overdraft facility at a lower interest rate. Banks consider your creditworthiness, credit history and their risk before they set your OD limit. 

Minimum Repayments

Several banks set a minimum monthly repayment limit for your overdraft facility. Ensure you consider the repayment process in addition to the interest rate before you avail an overdraft facility. 

Calculation of OD Loan Interest Rate

Since the amount borrowed for an overdraft can vary daily, the interest rate is calculated daily. However, the interest on overdraft is typically debited from your account monthly.

You can repay any amount of your OD at any time without informing the concerned bank beforehand. Early repayment helps you reduce your borrowed amount. An OD facility is similar to a short-term loan; as a result, repaying it quickly can help you avoid high interest charges. 

Notably, your interest amount is based on the annual interest rate, daily balance and the number of days you have used the OD facility. Moreover, banks calculate your OD interest rate on the outstanding balance and not your account balance. 

For instance, the bank sanctions an overdraft limit of ₹50,000, which must be repaid within the stipulated time along with applicable interest. 

If you withdraw ₹10,000 from this limit, interest will be charged only on the withdrawn amount. The interest rate is determined as per the agreement between you and the bank. 

Now let us consider that the interest rate is set at 10.5% for 6 months. Here’s how the interest calculation works:

Interest = (Principal × Rate × Time) ÷ 100  = (₹10,000 × 10.5 × 6/12) ÷ 100  = ₹525

Over the tenure, you would pay a total interest of ₹525, making the total repayable amount ₹10,525. 

Types of Overdraft Account

There are 5 types of Overdraft Accounts including OD against salary, OD against Fixed Deposit, OD against savings account, OD against insurance and OD against property. Here are more details for each overdraft account.

OD Against Salary

Employees can avail an overdraft facility against the salary credited in the account. While certain banks might have a minimum salary requirement, most banks allow account holders to withdraw 2 to 3 times their monthly salary.

Notably, the OD limit might vary based on the bank. However, to avail the OD facility, you need to hold a salary account with the concerned bank. 

OD Against FD

Banks often provide up to 75% of the fixed deposit amount as an overdraft (OD against FD). They charge an OD interest rate of 1% to 2% higher than the fixed deposit interest rate. Notably, the OD limit and interest rate might vary based on the policies of the bank.

OD Against Savings Account

Savings accounts opened under the Pradhan Mantri Jan Dhan Yojana are eligible for this facility. Adult family members (one member per family, preferably a woman) are eligible for ₹5,000 or 4 times the account balance, whichever is lower, as an overdraft. 

Earning members can get this facility if the account is at least 6 months old. The OD interest rate cannot exceed 2% beyond the base rate. Notably, Kisan Credit Card holders cannot avail this facility. The person availing the overdraft facility should have a second savings account based on RBI directives.

Moreover, among private banks, Citi Subidha Savings Account offers up to 5 times the net salary as overdraft. However, the bank sets a fixed EMI which customers can change based on their convenience. 

OD Against Insurance

Based on the surrender value of an insurance policy, you can get an overdraft facility. You can use your insurance papers as collateral. 

OD Against Property

Banks usually offer up to 40% to 50% of your property price as an overdraft. This facility comes with a higher sanction limit and a lower interest rate with your property as collateral. 

Pros and Cons of Overdraft Account

OD interest rate varies significantly based on the economic conditions and policies of the concerned bank. Further, if you have a low credit score, you might avail OD at a higher interest rate. To avoid paying interest on OD, you can start investing in fixed deposits to accumulate funds for the future. 

Stable Money-partnered banks offer up to 8.40% interest per annum on fixed deposits. Download the Stable Money app now to book multiple fixed deposits 24*7!