The overdraft facility is a credit facility offered by banks and commercial lenders to their most loyal and exemplary clients. Using this facility, borrowers can borrow more money than they have in their accounts. Normally, this facility is offered to individuals who need immediate and uninterrupted access to credit regularly. Overdraft interest rates tend to be higher than the personal loan or loan against property interest rates and therefore, funds should be borrowed under this facility only to take care of short-term liquidity issues.
Loans against property, also popularly known as property loans or loans against property, are a type of secured loan. Borrowers who own a property — residential or commercial — can borrow funds by pledging this property as collateral. Since the loan is backed by security, i.e. a real estate asset, lenders charge a low rate of interest on property loans.
So, what is an overdraft loan against property? The overdraft facility on a loan against property allows borrowers to withdraw as much money as they need from their loan against property approved line of credit and pay interest only on the borrowed amount. Some lenders also call this facility the flexi loan facility.
So, here is how an overdraft loan against property works.
- Based on your credit profile and the quality of the pledged collateral, your lender will approve a loan amount and put this loan amount into your loan against the property loan account.
- Borrowers can withdraw from this loan amount as and when they need money. Your lender will charge interest only on the borrowed amount. However, overdraft loans against property interest rates tend to be higher than normal loans against property interest rates and therefore, borrowers must use the overdraft facility only to handle short-term liquidity crunches.
- All lenders set a maximum limit on the amount of money one can withdraw from their loan against a property account. If a person charges more than the amount allowed, they are charged an overdraft fee. The overdraft fee tends to be quite high.
Now that we understand the basics of overdrafts on loans against property, let us familiarize ourselves with the advantages and disadvantages of both.
Overdraft Loan Against Property: Pros
- The overdraft loan against property facility offers flexibility to borrowers. Borrowers can use however much money they need from an approved line of credit.
- This facility acquits users from paying interest on the loan amount that they are not even using. Thus, the overdraft loan against property turns out to be more cost-effective in the long run than other types of loans, such as a personal loan or an overdraft loan.
- When you use an overdraft loan against property, you get a chance to improve your credit score. As previously mentioned, overdrafts on loans against property are an ideal way to deal with short-term credit requirements, availing of credit under this facility and then repaying it on time can certainly help one establish their ability to handle all kinds of credit and improve their credit score.
- An overdraft loan against property is an ideal option if you are someone who needs access to credit regularly.
Overdraft Loan Against Property: Cons
The overdraft loan against property also has some cons and before you avail yourself of this facility, you must familiarize yourself with both the benefits and drawbacks.
- Sometimes, borrowers start using the overdraft loan against property facilities to take care of their day-to-day expenses. Since lenders charge a slightly higher interest rate on money withdrawn under the overdraft loan against the property facility, these loans turn out to be costlier. Borrowers must, therefore, not use this facility to take care of their day-to-day expenses.
- If you borrow money under the overdraft facility but are not able to pay it on time, know that your credit score will be affected negatively, which in turn, will affect your ability to access credit in the future.
Final Words
In short, the overdraft loan against property is an excellent credit facility, if used well and one must avail themselves of this facility only after carefully weighing the pros and cons. More importantly, if you are planning to apply for a property loan, use a loan against property EMI calculator for monthly budgeting, repayment planning, and figuring out the right combination of loan value and loan tenor for you. Further, also talk to a tax expert to get a clearer understanding of loans against property tax benefits and how you can maximize these benefits.
