The word overdraft means over drawing. Unlike a normal home loan or a LAP, which are termed as term loans, an overdraft loan gives high flexibility to a customer.
Some of the banks offer an overdraft-linked loan with a home loan.
This loan gets linked with a current account opened in the name of the borrower, any money parked in the current account sets off against the outstanding principal of the loan and the interest gets charged on the balance amount.
To understand it better we will take an example:
Principal Outstanding: INR 90000
Balance in current account: INR 20000*
* The balance in current account is the monthly average balance maintained For this particular month the borrower pays interest on INR 90000-20000= 70000
This helps in saving on the cost of Interest at the same time gives high-level liquidity as well. As the money is parked in a current account the borrower can withdraw the money at any time as per need. The saving on interest is for the period the balance in account is maintained.
As the loans gets paid through payment of a fixed amount per month termed as EMI, the interest saved in an overdraft loan gets paid as principal. Higher principal paid in each EMI results is a reduction of the loan tenure.
This effectively means that the component of Interest and Principal in each EMI changes depending on the balance maintained in the current account.
All other terms of the loan like the eligibility, fees, Interest rate etc. are similar to that of a home loan or a LAP.
You can contact us for a personal visit of our officer to understand the concept better.