While navigating financial waters you may come across a situation where you are pressed for money. Whether it is required for personal reasons or business reasons, financial flexibility is key in helping you meet your financial obligations. Banks and financial institutions provide a number of loans and advances to help you financially. When it comes to short-term finance, the good old overdraft is a preferred financing method for many.
An overdraft facility is a form of credit lending which requires you to open a current account with a bank. Overdrafts have an approved credit limit which is the maximum amount that you can overdraw at any given point in time. This means that you can withdraw cash and draw cheques up to the approved limit. The interest that you pay is calculated on a daily basis on the amount overdrawn and is debited from your account monthly. If you are unable to pay the interest for a particular month, then it is added to the amount overdrawn in the next month. Interest rates for overdrafts are usually a percentage above the prime lending rate offered by the bank. So, the rate charged, for example, will be the prime lending rate + 3%. Since overdrafts are revolving loans, any amount that you repay can be redrawn if it is within the credit limit. Overdrafts are, in general, a short-term lending option that you can take advantage of.
Overdrafts are of two types – secured and unsecured.
A secured overdraft requires you to pledge assets to the bank. These assets are taken by the bank as security. In case there comes a time when the bank decides to end your overdraft facility and you are unable to repay the amount drawn, the bank can sell these assets to recover the money. If the money resulting from this sale doesn’t cover your debts, then you will be held liable to pay the difference. The credit limit for a secured overdraft depends on the asset type provided as collateral and is subject to your bank’s approval. Property, shares, and bank deposits like Singapore dollar term deposits and foreign currency term deposits are assets that can be pledged for a secured overdraft.
Unsecured overdrafts, as the name suggests, doesn’t require any asset to be pledged as security. As per current laws, the credit limit for unsecured overdrafts cannot be more than four times your monthly income. This law applies only if you have a minimum annual income of S$30,000. If your annual income is between S$20,000 and S$30,000, then the credit limit is up to two times the income you earn per month.
The way interest is charged on an overdraft can best be understood with the help of a representative example.
Let’s say that you have a secured overdraft account with the following credit limit and interest rate:
Credit limit = S$50,000
Interest rate = 6% p.a.
On 5 March you decide to use S$10,000. Then, on 10 March, you withdraw S$20,000. You come into some money on 20 March and decide to repay S$30,000. The interest that you will have to pay for the month is then calculated in the following manner:
So, the interest amount payable in this example is:
[S$10,000 x 6% x 5/365] + [(S$10,000 + S$20,000) x 6% x (20 -10)/365]
[S$10,000 x 6% x 5/365] + [S$30,000 x 6% x 10/365]
[S$8.22] + [S$49.32] = S$57.54
Secured overdrafts have features and benefits that make them a better choice than other forms of credit.
The following banks offer secured overdraft facilities.
The interest rate charged by the following banks for secured overdrafts are:
|Bank||Interest rate (per annum)|
|Maybank||Starts from 5.2500% and varies as per collateral pledged|
|BOC||Starts from 0.5% to 1.00% (not lower than 3 months SGD SIBOR + 1.00%)|
|HSBC||Prime lending rate + 2.5% (interest rate charged on balance in excess of credit limit) Other charges on interest can be found in the Letter of Offer or Notification Letter, if applicable|
|RHB||4.25% if FD is provided as collateral|
|5.50% if insurance policy is provided as collateral|
|6.00% if shares are provided as collateral|
|Citibank||Prime lending rate + 5% for temporary overdrafts|
|OCBC||Interest rate is dependent on the collateral pledged|
Fees and charges for overdrafts vary from bank to bank. Most banks, however, charge for issuing cheque books and for returning a cheque when your overdraft goes into excess. They also charge a penalty interest when you overdraw your account.
Some of the fees and charges of few banks that offer secured overdraft facilities are:
|Bank||Fees and charges|
|Maybank||Transfer fees to pledge assets: S$10.70|
|Minimum monthly interest on any amount of debit balance: S$20|
|BOC||Cancellation fee, if the overdraft is closed within 3 months of the date of acceptance of the facility letter: 0.0625% of the credit limit Minimum cancellation fee: S$50|
|Overdrawing an account after cancellation of the overdraft facility: 5% + prime lending rate|
|Overdraft excess: 5% + prime lending rate|
|Minimum overdraft interest: S$10 per month|
|HSBC||Minimum interest charge: S$10 per month|
|RHB||Overdraft excess: 5% + prime lending rate|
So, why take a secured overdraft instead of other forms of credit like a personal loan or other term loans? You can see how an overdraft stacks up against other term loans in the following table:
|Loan tenure||Short-term and revolving||Fixed term|
|Interest rate charged||Usually higher than term loans||Lower when compared to overdrafts|
|Interest rate type||Variable rates of interest. It depends on prime lending rates||Interest rates are variable and depend on the prime lending rate|
|Is it recallable on demand?||Yes, the bank can recall an overdraft at any time.||No, term loans, as the name suggests, are for a fixed time period|
|Can the loan be drawn again after a partial amount has been paid?||Yes, as long as it is within the approved credit limit||No. A term loan is sanctioned for a fixed amount|
|Does it have regular monthly payments?||No. Any amount can be paid||Yes. Term loans have fixed monthly instalments.|
|Can you make repayments at any time?||There is no fixed date for the payment to be made||Instalments have to be paid on the same date every month|
The bottom line, though, is that before taking out any form of credit, you need to consider the reasons for the same as well as factors such as the amount required, interest rates charged, and the terms of repayment.
Q. How do I know if I can apply for a secured overdraft?
A. To be eligible to apply for a secured overdraft, you need to be a Singaporean citizen or a Permanent Resident and above 21 years of age.
Q. Do I need to show any proof of income for a secured overdraft?
A. No. Secured overdrafts are given on the basis of the assets pledged and not your income. Proof of income is required only for unsecured overdrafts.
Q. What does prime lending rate mean?
A. Prime lending rate or prime rate is the lowest rate at which a bank is willing to lend money to its best customers in Singapore dollars.
Q. Will fluctuations in the market affect my secured overdraft?
A. Yes, secured overdrafts are subject to market fluctuations. Since secured overdrafts are provided against collateral, market fluctuations can change the value of your collateral and subsequently your approved credit limit.
Q. How do I apply for a secured overdraft?
A. The procedure to apply for a secured overdraft depends on the bank. But in most cases, you can apply for a secured overdraft online, through the bank’s website. You can also call the bank’s relationship manager or visit a local branch to apply.