What is the Overdraft Interest?
An overdraft or cash credit facility gives you a sanctioned limit you can draw on as needed. Interest is charged daily on the outstanding balance only — not on the full limit — which makes it ideal for fluctuating working capital needs.
The trade-off is a higher headline rate than a term loan, plus an annual renewal fee whether you use the facility or not.
Formula & worked example
Annual cost = Daily interest × days utilised + renewal fee
Worked example: a ₹20 lakh limit with ₹8 lakh average usage at 12% costs ₹263 a day. Used for 200 days that is ₹52,603 of interest plus a ₹10,000 fee. A term loan of the same ₹8 lakh would have charged ₹96,000 for the full year — the overdraft saves about ₹43,400.
How to use this overdraft interest calculator
- Enter your sanctioned limit and the average amount you actually draw.
- Enter the interest rate on the facility.
- Estimate days utilised across the year — this is what drives the cost.
- Add the annual renewal fee, which applies regardless of usage.
Smart tips
- Repay into the OD whenever cash is idle. Even a few days of lower balance reduces interest directly.
- An overdraft beats a term loan when needs are irregular; a term loan is cheaper for steady, full utilisation.
- The renewal fee applies even at zero usage — do not hold a large unused limit.
- An FD-backed overdraft typically costs only 1–2% above the FD rate, far cheaper than breaking the deposit.
- Consistently high utilisation signals stress to lenders and can affect future credit assessments.
Frequently asked questions
How is overdraft interest calculated?
Daily on the outstanding utilised balance: amount × rate / 365, charged for each day the balance is drawn.
Is an overdraft cheaper than a term loan?
If usage is irregular, yes — you pay only for what you use. For continuous full utilisation, a term loan's lower rate usually wins.
What is the difference between overdraft and cash credit?
Cash credit is secured against inventory and receivables for business use; overdraft is typically against property, deposits or income. Interest mechanics are the same.
Do I pay interest on the unused limit?
No, only on the amount drawn. However most facilities carry an annual renewal or commitment fee regardless of usage.
Want the theory behind the numbers? Read our working capital guides on the Money Blog.