FINANCING OPTIONS TYPE OF FINANCING

OVERDRAFT (OD)

MEMBERS:

YAZIRAN YAZID
DANIAL JAMIL
ZAKWAN RAMLEE
HAKIM HALIM
SAIFUL NORAZMAN
HALIFEAN RENTAP
SYAFIQ JOHARI

TPS 554 - HOUSING

 DEFINITION OF OVERDRAFT
An overdraft is when an individual's bank
An overdraft facility is a type of
account balance falls below zero,
demand loan that allows a person
meaning they owe money to their bank.
to borrow more money than they
This can happen when there's not enough
have in their account, based on a
money in the account to cover the latest
credit limit set by the bank. This
transactions, but a previous transaction
facility is also commonly known as a
is processed and ends up costing the
cash-based line of credit.
account holder more than they have in
their account. This means the bank has
to automatically lend the account holder
the necessary amount to cover the
transaction, which then has to be paid
back plus possible fees. If overdrafts
aren't handled quickly and properly,
then costs can spiral out of control.
Small and medium-sized
businesses (SMEs) frequently
use business overdrafts as a
source of funding, and these
loans are perfect for companies
with varying financial needs.
They are either offered over a set
period of time or continuously
with no end in sight. Overdrawn
accounts may be authorized or
not. In comparison to
unauthorized overdrafts, the
former is a pre-arranged facility
and will be provided at a
cheaper rate.
 ROLE OF AN OVERDRAFT

The overdraft allows the An overdraft is like any other

The bank allows customers to
borrow a set amount of money
customer to continue paying
bills even when there is
insufficient money.
Making the overdraft a better
loan: The account holder pays
short-term option in an
interest on it and will
emergency.
typically be charged a one-
time insufficient funds fee.
 OVERDRAFT
AGAINST SAL
A RY OVERDRAFT
USE
If borrowers hold
AGAINST HO
a salary an also
account with th Homeowners c ir
e lending 40-50% of the
banks, then they overdraw upto

TYPES OF
can be eligible
for a limit of tw
o or even three house’s value.
times their salary
amount.

OVERDRAFT ON
SAVINGS
OVERDRAFT OVERDRAFT
AGAINST FIXED
ACCOUNT DEPOSIT
The banks also provide this An account can be overdraw
facility for clients who have n
up to a certain percentage
of
active savings accounts with a fixed deposit. Generally, th
frequent transactions. e
interest rate on such credits
is
2% higher than the Fixed
Deposit’s ROI.

OVERDRAFT
AGAINST EQ
U ITY OVERDRAFT
AGAINST
Keeping the eq
collateral, a borr
uity as INSURANCE
ower can get
this facility; ho
wever, the POLICY
permissible limit be availed
less than the m
is significantly The facility can also
insurance
those stocks.
arket value of on the grounds of an
its
policy depending upon
surrender value.
 ADVANTAGE OVERDRAFT

Handles Timing Mismatch Helps in Keeping Good Track Timely Payments

of Flow of Funds Record

The cycle of cash inflows and outflows is reset by
overdrafts. The bank may allow you to use its
overdraft facility to help you manage the
difference between how much money you have
coming in and how much money is going out if you
have a lot of money coming in from sales and a lot
of money going out from purchases.
If a check is made out based on an amount that Due to the fact that payments can be made even
would be received if it is delayed, the check will if there is not enough money in the account, it
also guarantees
not bounce because there is enough money in the
account. The overdraft facility means that you
can have a better payment history.

Less Paperwork Flexibility

The overdraft facility's simplicity allows for less
paperwork than is typically needed for long-term
loans.
The cycle of cash inflows and outflows is reset by
overdrafts. The bank may allow you to use its
overdraft facility to help you manage the difference
between how much money you have coming in and
how much money is going out if you have a lot of
money coming in from sales and a lot of money
going out from purchases.
Although the overdraft facility
allows for flexible payments, you
will be charged a higher interest
rate.
Interest will be charged daily
based on the amount of overdraft
that has been used.
A commitment is a fee charged by
the bank to the user for the user's
unused overdraft amount.
A commitment fee is charged on
undrawn amounts, while interest is
charged on drawn amounts that
have been used.
While the flexibility of an overdraft
is a big plus, it can also be a
downside to this facility.
Higher Requires If the consumer does not have
high discipline to ensure that the
Interest Rates Discipline consumer pays it, overdraft can
be a long-term financial burden.
DISADVANTAGES OVERDRAFT
Commitment Unstable Banks can withdraw overdraft
facilities at any time, so make sure
Fee Credit Line
users don't rely too much on
them.
The bank can also review or
change the user's overdraft limit.
 formula & calculation
I = OD × P × R ÷ D
I = OVERDRAFT INTEREST
OD = AMOUNT OVERDRAWN
P= PERIODS OR DAYS UNTIL REPAYMENT
R = ANNUAL INTEREST RATE
D = 365 (DAYS IN YEAR, 366 IN CASE OF LEAP YEAR)

I = RM 20000 × 30 DAYS × 1.75% +3.65%

365 DAYS
EXAMPLE 1: MAYBANK OVERDRAFT FACILITY side note:
FOR EXAMPLE: COMMITMENT FEE

OVERDRAFT AMOUNT USED = RM20,000 COMMITMENT FEE

WILL BE CHARGED
NUMBER OF DAYS OVERDRAWN = 31 DAYS OF TOWARDS THE
JANUARY 2016 UNUSED FUNDS

INTEREST RATE = BR (ASSUME IT IS 4.0%) + 1.35%

PER ANNUM
SO THE INTEREST CHARGED FOR JANUARY 2016
WOULD BE RM ?
 EXAMPLE

EXAMPLE SCENARIO

SIDE NOTE
Mary went to a retail outlet and purchased cosmetics
amounting to $2,000 and wrote a check for the purchase.
The total overdraft amount is usually decided by $1,500 ONLY CONTAINED IN MARY'S ACCOUNT FOR THE
banks. MERCHANT
based on what you pledge as collateral to the bank. means $500 short of what is due for the check.
if you were to pledge a property worth RM500,000 you
would be able to get up to 50%
For the outcomes :
which IS in this case would be RM250,000.
the calculation method for an overdraft limit is based
FIRST :
upon the bank’s discretion.
the merchant’s bank will pay him the full amount.

SECOND :
BANK will let the check “bounce” to Mary’s bank and stamp
it with “NSF” (non-sufficient funds).

In case the first outcome unfolds, Mary will be charged for the
$500 overdraft.