0 hidden charges. 0 forex
debit-card

Overdraft vs Personal Loan: Which is Better?

FACT CHECKED
Reviewed by
.
Created on
January 20, 2023

Summary

What’s Inside

A detailed comparison of a loan vs overdraft facility can help you quickly determine which is right for you, especially in emergency financial requirements. 

In this article, we will be taking a closer look at these kinds of borrowings, their advantages, and their key differences. Let’s begin with the overdraft facility. 

What is an Overdraft Facility? 

An overdraft, also known as a bank overdraft or OD is a facility that many banking institutions offer on their savings accounts and current accounts. This feature allows you to withdraw more cash than what’s already available in your account.

Here’s an example to help you better understand this concept:

  • Say you have ₹10,000 in your current account. You purchase a TV worth Rs. 12,000 using your debit card. Usually, you will not be able to proceed with this transaction since you have a shortfall of around ₹2,000.
  • However, if you’re eligible for an overdraft facility, you can purchase a TV worth ₹12,000 despite the shortfall. However, this facility comes at a cost. Since an overdraft is essentially the bank lending you money, a fixed interest rate will be charged on the additional amount you use or withdraw.

So, in the above example, you will have to pay interest on the additional ₹2,000 you spent. 

Advantages of an Overdraft Facility

Here are some of the most important benefits you can enjoy from an overdraft facility. 

1. Minimal interest impact 

With overdrafts, you only pay interest on the overdrawn amount, such as ₹2,000. The interest is calculated daily, so if you repay the overdrawn amount quickly, the interest impact is minimal.

2. No prepayment charges 

You can repay the overdrawn amount at any point — even on the same day of withdrawal. Unlike in the case of other loans, banks don’t levy any charges for overdraft prepayments. 

3. Flexible repayments 

An advantage of an overdraft facility is the flexibility to repay the overdrawn amount in multiple instalments instead of a single lump sum payment.

What is a Personal Loan? 

A personal loan is an unsecured credit facility banks, and Non-Banking Financial Corporations (NBFCs) offer. You need not offer any collateral to avail of this kind of loan. Of late, personal loans have quickly become one of the most popular ways of gaining access to funds. 

The amount of personal loan you can avail of may vary depending on different factors, such as your credit score, income levels, age, financial institution you choose to borrow from, and other similar factors. Lenders levy interest on the amount borrowed in exchange for providing you with funds in the form of a loan. You will then have to repay the principal amount of the personal loan you avail of, along with interest through Equated Monthly Installments (EMIs) spread across a tenure of your choice. 

Want to understand your chances of approval for a personal loan? This blog explains in detail how one can get approved for a personal loan.

Advantages of a Personal Loan 

As with the overdraft facility, personal loans also have advantages. Let’s take a quick look at a few of the most important ones. 

1. Zero collateral requirements 

Personal loans are unsecured borrowings. This means you don’t have to pledge any asset as collateral to secure the loan, making it more accessible for many individuals.  

‍2. No usage restrictions

With a personal loan, there are absolutely no restrictions regarding the end use of the funds. You can use the amount borrowed to fund your child’s education, pay for a vacation, or even to purchase your favourite gadget. 

‍3. Customizable repayment tenures

Another advantage is the freedom to choose the repayment tenure for your loan, typically ranging from 12 to 60 months. 

Personal Loan vs Overdraft: The Key Differences 

Now that you’ve seen what these two types of credit facilities are, let’s get to know the difference between a loan and overdraft.

Particulars

Personal Loan

Overfdraft 

Size of the loan 

With personal loans, you can borrow large amounts of money. Depending on your eligibility, you can get even up to ₹25 lakhs or more loans. 

Banks generally tend to impose a limit on the amount that you can overdraw from your account. These limits usually tend to be lower than that of most personal loans. 

Interest

Interest is charged on the entire amount borrowed via the personal loan. 

Interest is only charged on the amount you overdraw, essentially what you borrow from the bank. 

Repayment tenure 

With personal loans, there’s a fixed repayment tenure. However, you have the freedom to choose the tenure of your choice from the given range. 

There’s no fixed repayment tenure with overdrafts. You can repay the sum as and when you wish to. However, you continue to accumulate interest on the unpaid amount.

Processing time 

Although it can be instant in many cases, the process of availing of a personal loan may take a few days sometimes. 

This facility is more instant. Once the OD facility is granted, you can make use of it at any point in time. 

Charges

Financial institutions offering personal loans typically tend to levy charges like processing fees and prepayment penalties, among others. 

Banks generally don’t levy any fees or charges for availing of the overdraft facility. 

Conclusion

So, there you have it — a detailed comparison of a personal loan vs an overdraft facility. Now, if you’re wondering which of these two credit facilities would suit you, here’s something that can help. 

A personal loan is more suitable for situations and expense heads that require large sums of money, such as payment for a wedding ceremony, meeting the costs of your child’s higher education, and more which can be repaid in small and affordable equated monthly instalments. 

On the other hand, an overdraft facility may make more sense if you plan on using it to cover for more minor expenses and emergency fund requirements, which can be repaid shortly. 

Get a Personal Loan from Fi in Minutes 

Fi Money provides instant loans that arrive directly in your savings account. These are pre-approved personal loans made available to select users with good credit scores. This process is 100% paperless, and the loans are provided at competitive interest rates — where each user remains in control with complete visibility of all details. Plus, you can avoid EMI late fees by setting up automatic in-app payments. Our licensed partner bank assigns an eligible loan amount to each user (up to ₹5 lakh).

Frequently Asked Questions (FAQs)

‍1. Is an overdraft the same as a loan?

No, an overdraft is different from a loan. An overdraft allows you to withdraw more money than what’s available in your savings or a current account as and when you need it. On the other hand, a loan is a lump sum amount that a financial institution provides you with, which you’re required to repay over a certain period of time along with interest. 

‍2. Why is an overdraft cheaper than a loan?

One of the many reasons an overdraft may carry lower or no charges is that the facility comes with lower borrowing limits when compared to loans. Also, unlike in the case of a loan, interest on overdrafts is only charged on the amount that you overdraw and not on the entire amount you withdraw. ‍

3. Which bank is best for an overdraft facility?

All public and private sector banking institutions offer an overdraft facility at different interest rates. Any bank that charges a low-interest rate is often considered the better option for overdraft loans since it effectively lowers the overall cost of your borrowing. 

4. Which one is better: a personal loan or an overdraft?

Both personal loans and overdrafts are excellent credit facilities that have their own set of advantages. Personal loans are more suitable for meeting more extensive monetary requirements, whereas overdrafts are ideal for covering more minor, short-term fund requirements. 

Curious? Read more here

1. What are personal loans all about and how do they work?

2. Instant personal loans - A guide to applying online

3. What are the benefits of a personal loan?

4. How to get good interest rates on personal loans

5. How to get a personal loan in simple steps 

Disclaimer

Fi Money is not a bank; it offers banking services through licensed partners and investment services through epiFi Wealth Pvt. Ltd. and its partners. This post is for information only and is not professional financial advice.
Share this article
Copied Link!
Blog
>
Loans and Lending
>
Overdraft vs Personal Loan: Which is Better?

Sources

View similar articles in
Loans and Lending
Get the Fi app