Generally speaking, overdrive (OD) is the highest gear in the transmission. Most automatic transmissions have 3 speeds and overdrive (fourth speed). Overdrive allows the engine to operate at a lower rpm for a given road speed. This allows the vehicle to realize better fuel efficiency, and often quieter operation on the highway. When you switch it on, you allow the transmission to shift into overdrive mode after the certain speed is reached (usually 30 - 40 mph (50 - 65 kph) depending on the load). When it is off, the transmission shifting is limited to the lower gears. For normal driving conditions, operation of the overdrive should be enabled.
It may be necessary to switch it off if the vehicle is being operated in a mountainous area.
The automatic transmission automatically shifts from OD to 3rd gear when more load is present. When less load is present, it shifts back to OD. Under certain conditions, e.g: driving uphill or towing a trailer, the transmission may "hunt" between OD and 3rd gear, shifting back and forth. In this case, switching it off can help the transmission to 'decide'. It may also be advantageous to switch it off if engine braking is desired, for example, driving downhill. For more details, check your owner's manual.
How an overdrive unit works:
The overdrive consists of an electrically or hydraulically operated epicyclic gear train bolted behind the transmission unit. It can either couple the input driveshaft directly to the output shaft (or propeller shaft) (1:1), or increase the output speed so that it turns faster than the input shaft (1:1 + n). Thus the output shaft may be "overdriven" relative to the input shaft. It is actuated by a knob or button, often incorporated into the gearshift knob, and does not require operation of the clutch.
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