Overdraft


What is an overdraft facility?

An overdraft facility allows you to write cheques or withdraw cash from your current account up to the overdraft limit approved. It is a short-term (usually up to 12 months) standby credit facility which is usually renewable on a yearly basis. It is repayable on demand by the bank at any time.

The overdraft limit is the maximum amount that you can overdraw. You pay interest only on the amount that you overdraw. Interest is calculated on the daily balance overdrawn and debited to the account monthly. Any unpaid amounts of interest are added to the overdrawn amount in the following month. The interest rate on an overdraft account is usually charged at a percentage over the bank’s prime lending rate, for example, Prime + 3% per annum.

Whatever amount you repay into the overdraft account can be withdrawn again as long as the total outstanding amount is within the overdraft limit granted. This is why it is called a “revolving credit facility”.

What types of overdraft facilities are available?

An overdraft facility can be granted on a secured or unsecured basis.

A secured overdraft is one where you pledge an asset to the bank as security. The asset could include deposits in the bank, property or shares.  If the bank stops your secured overdraft facility and you are unable to repay your debt, the bank has the right to sell your pledged assets to recover what you owe it. If the proceeds are not enough to recover your debt, you are still liable for the difference.

An unsecured overdraft facility is one where no assets are pledged as security. Under current laws, banks can only grant unsecured credit of up to four times an individual's monthly income, if his annual income is at least S$30,000.  This includes credit granted on credit cards and other unsecured credit facilities.  For individuals with an annual income of between $20,000 and $30,000, a maximum credit limit of two times' his monthly income will apply.

What features and risks do overdrafts have?

Approved credit limit

Every overdraft facility has an approved credit limit.

Repayable on demand at any time

An overdraft facility is not subject to any repayment as long as the amount used is within the overdraft limit. But, it is repayable on demand by the bank at any time.

No minimum monthly payment

There are no minimum monthly repayments for an overdraft facility as long as the amount you owe is within the credit limit. But, if the account goes into “excess” you need to repay the excess amount immediately.  If the excess is not paid immediately, the bank can stop the overdraft facility and require you to repay the full outstanding amount within a given time. If the bank recalls your overdraft facility, your credit record will be adversely affected.

Joint borrowers allowed

As a joint applicant of an overdraft facility, you and your joint applicant(s) are equally liable for the outstanding debt. You will be liable for the debt even if it was the other applicant who used the facility. The bank can choose to recover the total outstanding debt from all account holders, partial amounts from each account holder, or the total amount from any one account holder.

What fees and charges are there?

The overdraft facility has various charges. 

 

Interest charges

 

Interest is charged based on the amount of overdraft used and is calculated on a daily basis. It is debited from the account at month-end. If interest is not paid, it will be accumulated as part of the principal and rolled over to the next month.

 

Cheque book charge

 

Some banks charge for the cheque books issued to you.

 

Returned cheque charge

 

When you issue a cheque that will cause the outstanding amount in your account to exceed the overdraft limit, your account will go into “excess”. The bank can return your cheque because you have insufficient funds in your account. When this happens, a “returned cheque charge” will be levied on you. In addition, the bank will charge penalty interest on the amount of the excess.

 

Penalty interest

 

When your account goes into “excess” and the bank approves the excess, the interest rate that is charged on the excess amount is usually higher than the agreed rate. This higher rate is normally called the “penalty interest” rate.

How does an overdraft compare with other forms of credit?

An overdraft facility, being a revolving short-term credit facility, is not subject to any repayment as long as the amount used is within the credit limit. The overdraft facility however is repayable on demand by the bank at any time. On the other hand, a term loan must be fully repaid over the period of the term loan by regular instalment repayments or at maturity.

A comparison of the main characteristics of overdraft facilities and term loans is shown below: 

Overdraft Term Loan 
Loan tenure  Short-term revolving Fixed Term 
Interest Rate charged  Usually higher than term loan Usually lower than overdraft 
 Interest rate type Variable, pegged to prime rates Variable, pegged to Prime
Recallable on demand?
Yes No
Loan can be partially drawn again after repaying some amount?
Yes No
Regular repayment?
No Yes
Repay anytime? Yes No

 

The above information is prepared in collaboration with the Association of Banks in Singapore.