An overdraft facility is not like a conventional personal loan. there are differences between the two. For starters, an overdraft facility is a secured form of financing. An overdraft facility can be defined as follows.
An overdraft facility is one where you can withdraw an amount that is more than what is available in your current account based on a set credit limit. You shall repay the amount you have withdrawn earlier abiding the policies determined by the bank. This facility is also known as cash line facility. You can get the overdraft facility only when you provide a collateral i.e., you have to pledge your property, a fixed deposit, shares, bonds, unit trusts, etc.
The credit limit of the overdraft is usually half of the collateral value. Say, you provide a fixed deposit certificate of RM30,000 as a collateral, then you will be eligible for an overdraft facility with a credit limit of up to RM15,000.
Generally, the minimum overdraft amount you can get is RM10,000. The maximum credit limit you can get may go up to RM5 million based on the collateral you provide.
How is Interest Calculated?
The interest on overdraft depends on the Base Lending Rate of the bank. Also, the interest is calculated on a daily balance of the overdraft. You can use the formula given below to calculate the interest:
Interest = (Amount Overdrawn x Interest Rate x Number of Days)/365
For example, let us consider CIMB Bank’s Credit Line Secured Overdraft facility where the interest rate is Base Rate + 1.35%. The bank has specified the Base Rate to be 4.00% p.a. If you have overdrawn an amount of RM10,000 for a period of 28 days. The interest payable in this case is:
Interest = (RM10,000 x (4%+1.35%) x 28)/365
Interest = RM41.04
Therefore, you will be repaying a total amount of RM10,041.04 for overdrawing an amount of RM10,000 when you repay after 28 days.
- Minimum: 21 years.
- Maximum: 60 to 70 years, based on bank’s discretion.
- Malaysian citizens.
- Non-resident Malaysian citizens.
- Collateral: You must provide a collateral based on the bank’s requirement.
You can choose any of the following modes to repay the overdrawn amount with the interest:
- Cash via cash deposit machine.
- Online funds transfer
- Fund transfer via MEPS
- Unlike a regular personal loan, the overdraft facility has no pre-determined instalment amount or repayment tenure. The interest is charged only on the amount you have overdrawn.
- Overdrafts are flexible as you can withdraw as per need and repay the amount you have withdrawn as per your convenience.
- Interest is calculated only on the amount you have overdrawn.
- Your debt servicing ratio may be affected even when you don’t utilise the overdraft facility you have enrolled for.
- You will be charged with a higher rate of interest as compared to a personal loan.
- You have to plan on how you will repay the overdrawn amount and stick to it.
Overdraft facilities should be treated like any other loan and you must ensure you do not treat the funds obtained as extra cash. Always make sure you are borrowing only what you need and only what you can repay with ease.