Overdraft refers to a financial situation where you can withdraw more than you should from a banking account. It is a concept which has been accorded to bank customers in the past but has not been extremely popular in recent years.
Overdraft facilities in Malaysia
Did you know that there are actually overdraft (known in short as OD) in Malaysia? You might not have heard too much about this in recent years but it still exists in the banking industry today. In fact, most people are not aware the OD facilities and its features.
What are OD facilities?
The first misconception about OD is that it is meant for the experts. Should you be concerned about having an OD or should you need any of it? To answer this question, it is imperative that you first know what an OD is. If you understand how a credit card works, then you will more or less know how and OD works. It is actually a line of credit accorded to you as a bank customer.
But first, you must hold a current account with the bank. This means that you would have a checking account with the bank. Here, you will be given a certain credit limit. This is the very same credit limit that has been accorded to you like how you have in a credit card. To understand this further, when you have a savings account, you only get to withdraw only up to the maximum amount in your account. With this line of credit, you can use up the amount in your line of credit.
Having said that, the difference here is that you will sometimes be required to use some form of collateral. This could come in the form of shares, property or even deposits. In other words, you need to have some form of guarantee before the bank will give you the line of credit. However, without such collaterals, the bank might give you this as well but with a higher interest. In some cases, it could also be an unsecured provision
How is the interest calculated?
Unlike credit cards and other types of loans, the OD is calculated usually based on the BLR (Base Lending Rate) and then multiplied with the balance of the overdraft on a daily basis. This means that the utilized amount will be the figure where the interest rate will be calculated.
This means that the interest is basically the overdrawn amount multiplied by the current interest rate and then multiplied by the number of days divided by 365 days.
Who should you get this from?
Most banks that offer a checking or current account will give you such a facility. This simply means that most banks in Malaysia will offer you the facility. Among them includes:
- Maybank Cash Line Facility (Overdraft)
- HSBC Personal Overdraft
- CIMB Credit Line Secured Overdraft
Islamic Overdraft facilities
Besides the common conventional banks that offer such a facility, you can opt for shoes that offer Syariah compliant overdraft facilities. This is provided usually for both Muslims and non-Muslims who prefers Islamic banking services.
This is provided via the following:
- Murabahah which is based on the sale on cost margin of the cost
- Bai Bithamin Ajil based on the deferred payment sale
- Bai Al Inah based on the sale and buy-back principle
Why do you need an OD?
There are several reasons why you will need an OD. The most obvious and common one would be because you will appreciate the flexibility. This is where you can choose and decide how and when to make any sort of payments you need. In other words, you can decide on the payment schedule of loans of your choice.
Secondly, you can plan your interest. This is where you can choose to use the facility whenever it is convenient for you. After all, you will only be charged with the interest of the amount only when you use the OD. When you have the extra cash to pay the interest, then you can use the facility.
On the other hand, you will have to live with a higher interest rate. While you can enjoy flexible payments, you will have to pay higher interest rates and that would be the price to pay for enjoying this flexibility. As mentioned, the interest rate will be charged on a daily basis.
What other issues should you be aware of?
The first thing that you will come across will be the commitment fee. This is where the bank will charge you a fee for any unused amount in your overdraft. For instance, if your line of credit is RM50,000 and you use only RM30,000, there will be a 1% per annum commitment fee on the remaining RM20,000.
On the other hand, you will need to ensure that you pay off your outstanding amount (funds used) in the shortest time possible. In fact, clearing off this amount should be the top of your priority if you have an OD facility.
At the end of the day, the OD facility is given to you for a few reasons. First, the bank would want to earn the interest through you. but in doing so, the bank is giving you the convenience that you might require especially if you are running a small business or a business set up.