What is an overdraft facility and how is it different from other revolving credit facilities such as a personal credit line?
An overdraft facility is a revolving credit facility offered by banks on a current account. You can draw cheques or withdraw cash at ATMs or over-the-counter up to the credit limit approved. The overdraft limit is the maximum credit amount that you can overdraw. You pay interest only on the amount that you overdraw. Interest is calculated on daily balance and debited to the account monthly. The interest rate on an overdraft account is usually charged at a percentage over the bank’s prime lending rate, for example, prime plus 3 per cent per annum. Whatever amount you repay into the overdraft account can be withdrawn again as long as the total outstanding amount is within the credit limit granted, hence the term “revolving credit facility”. The overdraft facility is a short-term facility which is usually renewable on a yearly basis and is repayable on demand by the bank at any time. Banks also offer other forms of revolving credit facilities. These operate somewhat like overdraft facilit
