Overdraft is a line of credit (same category as credit cards) and accessed via a current account. Typically, a customer can only draw as much money as he has in his account. But with OD facilities, a customer can withdraw more than is available in the current account, up to a set credit limit.
ODs can be secured against collateral (E.g. Deposits, property, shares) which allows for better interest rates, or can also be unsecured.
The Interest Calculation
The interest rate on OD usually references the BLR rate and is calculated on the daily balance of overdraft (utilised amount). The following is the formula of calculating the interest rate.
Interest charged = Overdrawn Amount x Interest Rate x Number of days / 365 days
Total Overdrawn Value = RM 20,000
No. of Days Overdrawn = 30 days in billing period of Sep 2013
Interest Rate = BLR + 1% per annum
Thus, interest charged for September 2013 is calculated as:
RM 20,000 x (6.6% + 1%) x 30 / 365 = RM124.93
For a cash out, should I get a Mortgage / Home Loan or Overdraft or Personal Loan?
|Criteria||Overdraft||Mortgage Refinancing / Personal Loan|
|Availability||Complicated approval process.
Once approved, funds are available any time without further need for approval
|Requires loan application and approval.
Mortgage Refinancing – Complicated approval process
Personal Loan – Simple approval process
|Tenure||Variable with no limit on tenure. Access to facility and credit limit is reviewed yearly by bank.||Loan must be repaid within tenure.
Mortgage refinancing cash out mostly limited to 10 years.
Personal loan tenure limited to 10 years
|Interest Rate||Interest rates are higher than mortgage loans. But interest only charged on utilized amount||Mortgage Refinancing – Interest rate is lower than OD
Personal Loan – Based on Flat Interest and generally more expensive than OD
|Repayment||Can repay anytime and any amount. But charges will accrue to outstanding balance||Paid via regular instalments|
|Drawdown Amount||Can draw down multiple times as needed, any amount within credit limit||Drawdown in lump sum, fixed amount|
Overall, an OD facility offers the most flexibility, personal loans have the simplest approval process, while mortgage loan refinancing is still the cheapest.
Advantages of Overdraft
- All round flexibility
- No fixed repayments
- Avoid bounced cheques if overdrawn
- Interest charged only on utilized amount
Disadvantages of Overdraft
- Higher interest rate than mortgage loans
- Requires more discipline than a term loan to pay off
- May affect a person’s DSR eligibility calculation even if line of credit is not utilized
- Banks can recall the OD facility or change the credit limit any time
Beware The Dog
Some banks may charge a small commitment fee (usually 1% of your unutilized amount) even if you do not utilize your line of credit. Remember to read the fine print!
OD facilities are suitable for people who want the flexibility to access cash on quick notice. These include businessmen, investors, and the savvy consumer. One should be disciplined with ODs since there is no fixed repayment schedule.
Finally, if you are considering mortgage refinancing as an alternative, remember to make use of Home Loan refinancing comparison tool to compare and apply for the best mortgage refinancing packages out there J