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What Is a Home Loan Overdraft Facility? Meaning & Benefits
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A home loan is a major financial commitment that can last for many years. This is why everyone wants to repay it as soon as possible. To help you do so, banks let you prepay the loan early, partially or in full before the end of the tenure. This facility is called prepayment. However, it might not always be beneficial. One, because you might have to pay prepayment charges. Second, because once you prepay the loan, you cannot withdraw the funds when a need arises.
A better option to prepay a loan with your extra funds is through a home loan overdraft facility. With a home loan overdraft facility, you can deposit your surplus fund in the home loan account and withdraw it easily if you need money.
Let us know more about a home loan overdraft facility.
What Is a Home Loan Overdraft Facility?
A home loan overdraft facility acts like a bank account where you can deposit and withdraw money whenever you want. But it has an additional benefit. When you deposit extra funds in the home loan account over and above the EMI, it is treated as the home loan prepayment. This in turn helps you reduce the interest payout and the outstanding balance.
Now, as you have deposited the extra funds, you might not have enough money in your bank account. What if you suddenly need funds for something? In such a situation, you can withdraw the surplus fund that you deposited in the home loan account and use it for your financial needs. However, when you do so, the home loan outstanding balance would proportionately increase. Consequently, it can increase the interest payout on your total outstanding loan amount.
Overdraft facility is beneficial for people who have a fluctuating income. It could be a businessman who does not earn the same amount every month, or a salaried professional who has cyclic freelancing income or receives a periodical bonus.
Advantages of Overdraft Facility
Limitations of Overdraft Facility
To Sum up
Sure, a home loan overdraft facility helps you fulfil your immediate financial needs. But, more importantly, it helps you deposit and withdraw funds from the loan account at your convenience. However, you should note that an overdraft facility should be availed only when you have surplus funds available for pre-payment, otherwise its interest rate can instead increase the cost of borrowing.
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