Credit Card Loan vs Personal Loan: Which is Best for You?

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Credit Card Loan vs. Personal Loan: Which One Should You Choose?

Fixed vs Floating Interest Rate: Understanding the Key Differences & How to Choose?

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Personal Loan Documents Required in India: Eligibility & Process

Detailed guide comparing overdraft accounts (OD) and personal loans. Explore interest rates, repayment, benefits & find out which borrowing option is best for you.

Overdraft vs Personal Loan: Which is Better? | Fi Money

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"Overdraft vs Personal Loan: Which is Better? | Fi Money"

Anoop Menon

Get your loan basics covered: Think interest rates, clearing debt, etc.

<p>A detailed comparison of a loan vs overdraft facility can help you quickly determine which is right for you, especially in emergency financial requirements.</p><p>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.</p><h2>What is an Overdraft Facility?</h2><p>An overdraft, also known as a <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/know-all-about-an-overdraft-account-its-interest-rate-features-types-benefits">bank overdraft or OD </a>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.</p><p>Here’s an example to help you better understand this concept:</p><ul role="list"><li>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.</li><li>However, if you’re eligible for an overdraft facility, you can purchase a TV worth ₹12,000 despite the shortfall.&nbsp;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.</li></ul><p>So, in the above example, you will have to pay interest on the additional ₹2,000 you spent.</p><h3>Key Terms Explained</h3><h4>OD Account / Overdraft Account</h4><p>This is a bank account with an overdraft facility, which allows you to withdraw more than your available balance.</p><h4>Bank OD Means</h4><p>A bank-provided credit facility permits account holders to overdraw their accounts up to a predetermined limit.</p><p><strong>OD Account Full Form:</strong> It stands for "Overdraft Account."</p><h4>Types of Overdraft</h4><p>Overdrafts can be broadly categorised as:</p><ol><li><strong>Secured Overdrafts: </strong>These are backed by collateral such as fixed deposits, property, or shares.</li><li><strong>Unsecured Overdrafts: </strong>These don't require collateral but are often linked to salary accounts and typically offer lower limits.</li></ol><h2>Advantages of an Overdraft Facility</h2><p>Here are some of the most important benefits you can enjoy from an overdraft facility.</p><h3>1. Minimal interest impact</h3><p>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.</p><h3>2. No prepayment charges</h3><p>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.</p><h3>3. Flexible repayments</h3><p>An advantage of an overdraft facility is the flexibility to repay the overdrawn amount in multiple instalments instead of a single lump sum payment.</p><h2>What is a Personal Loan?</h2><p>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.</p><p>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 Instalments (EMIs) spread across a tenure of your choice.</p><p><strong>Understand your chances of </strong><a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/how-to-get-approved-for-a-personal-loan"><strong>approval for a personal loan</strong></a>.</p><h2>Advantages of a Personal Loan</h2><p>As with the overdraft facility, personal loans also have advantages. Let’s take a quick look at a few of the most important ones.</p><h3>1. Zero collateral requirements</h3><p>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.</p><h3>‍2. No usage restrictions</h3><p>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.</p><h3>‍3. Customizable repayment tenures</h3><p>Another advantage is the freedom to choose the repayment tenure for your loan, typically ranging from 12 to 60 months.</p><h2>Overdraft vs Personal Loan: Detailed Comparison<br>&nbsp;</h2><p>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.</p>

<h2>Interest Rates Explained</h2><h3>Overdraft Interest</h3><p>In an overdraft facility, interest is calculated daily on the amount utilised. For example, if your overdraft limit is ₹5 lakhs but you use only ₹2 lakhs for 10 days in a month, interest will be charged only on the ₹2 lakhs for those 10 days. If the overdraft interest rate is 12% p.a., the interest calculation would be: ₹2,00,000 × 12% × (10/365) = ₹657.53</p><h3>Personal Loan Interest</h3><p>For personal loans, interest is calculated on the entire loan amount as part of your EMI. Even though you're gradually paying off the principal, the EMI is structured to include interest on the reduced balance. For example, on a ₹5 lakh loan at 10% interest for 3 years, your monthly EMI would be approximately ₹16,132, and you would pay a total interest of about ₹81,143 over the loan tenure.</p><h3>Comparison</h3><p>While overdraft facilities might have higher interest rates, they can be more economical for short-term needs since you pay interest only on the utilised amount. Personal loans offer predictability with fixed EMIs but require interest payment on the entire loan amount from day one.</p><h2>Pros and Cons</h2><h3>Overdraft Facility</h3><h4>Pros:</h4><ol><li>Flexibility to withdraw and repay as per requirement</li><li>Interest is charged only on the amount used.</li><li>Quick access to funds, especially if pre-approved</li><li>No fixed repayment schedule, offering financial freedom</li></ol><h4>Cons:</h4><ol><li>Potentially higher interest rates compared to personal loans</li><li>Usually requires collateral or a strong banking relationship</li><li>Risk of falling into a debt trap if not managed properly</li><li>Annual renewal may be required</li></ol><h3>Personal Loan</h3><h4>Pros:</h4><ol><li>A fixed repayment schedule makes budgeting easier</li><li>Potentially lower interest rates compared to overdrafts</li><li>Usually, no collateral is needed</li><li>Larger loan amounts available for significant expenses</li></ol><h4>Cons:</h4><ol><li>Interest paid on the full amount from day one</li><li>Less flexibility in usage and repayment</li><li>Prepayment charges may apply if you want to close early</li><li>Strict eligibility criteria</li></ol><h2>OD Loan / Personal Overdraft Loan Explained</h2><p>A personal overdraft loan, often called an OD loan, is a hybrid product that combines features of overdrafts and personal loans. It typically provides a pre-approved credit limit you can access as needed, similar to an overdraft, but with more structured repayment terms like a personal loan. This option is gaining popularity among banks as it offers consumers flexibility while maintaining some repayment discipline.</p><h2>When to Choose an Overdraft Facility?</h2><p>An overdraft facility is ideal when:</p><ol><li>You need funds for short-term, fluctuating requirements</li><li>You're uncertain about how much money you'll need</li><li>You want to pay interest only on the amount you use</li><li>You have irregular income patterns and need flexibility</li><li>You need quick access to emergency funds</li><li>You have a temporary cash-flow mismatch in your business</li></ol><h2>When to Choose a Personal Loan?</h2><p>A personal loan is better suited when:</p><ol><li>You need a specific amount for a planned expense</li><li>You prefer fixed EMIs for better budget planning</li><li>You require funds for a longer duration</li><li>You need a larger amount than what overdraft facilities typically offer</li><li>You don't have collateral to secure an overdraft</li><li>You want to consolidate existing high-interest debts</li></ol><h2>Conclusion</h2><p>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.</p><p>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.</p><p>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.</p><h2>Get a Personal Loan from Fi in Minutes</h2><p><a target="_blank" rel="noopener noreferrer" href="https://fi.money/features/instant-loans">Fi Money </a>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).</p><h2>Frequently Asked Questions (FAQs)</h2><h3>‍1. What is the main difference between overdraft and personal loan?</h3><p>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.</p><h3>‍2. Why is an overdraft cheaper than a loan?</h3><p>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. ‍</p><h3>3. Which bank is best for an overdraft facility?</h3><p>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.</p><h3>4. Which one is better: a personal loan or an overdraft?</h3><p>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.</p><h3>Is the interest rate higher for overdrafts or personal loans?</h3><p>Typically, overdraft interest rates are higher than those for personal loans. However, since overdraft interest is charged only on the utilised amount, it might work out cheaper for short-term usage than personal loans, where interest is charged on the entire amount.</p><h3>What does an OD account mean in banking?</h3><p>OD account stands for Overdraft Account, a bank account with an overdraft facility that allows you to withdraw more than your available balance up to a pre-approved limit.</p><h3>Can I get an overdraft facility without collateral?</h3><p>Unsecured overdrafts are available, especially if you have a salary account or a good relationship with your bank. However, the limit for unsecured overdrafts is usually lower than secured ones.&nbsp;</p><h3>How is interest calculated on an overdraft?&nbsp;</h3><p>Interest on an overdraft is calculated daily based on the actual amount utilised, not on the entire limit. Most banks use the formula: (Amount utilised × Interest rate × Number of days)/365.</p><h3>What is the full form of an OD loan?</h3><p>The full form of an OD loan is an Overdraft Loan, which refers to a credit facility where you can borrow beyond your account balance up to a predetermined limit.</p><h3>Is OD a type of loan?</h3><p>Yes, an overdraft (OD) is technically a type of loan, but it differs from traditional loans in its flexibility, usage pattern, and repayment structure. It's more accurately described as a revolving credit facility.<br>By understanding the key differences between overdraft facilities and personal loans, you can make a more informed choice based on your financial needs, usage patterns, and repayment capabilities. Remember that the best option depends on your unique circumstances and financial goals.</p><h2>Curious? Read more here</h2><p><a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/what-are-personal-loans-all-about-how-do-they-work">1. What are personal loans all about and how do they work?&nbsp;</a></p><p>‍ <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/instant-personal-loans-a-guide-to-applying-online">2. Instant personal loans - A guide to applying online&nbsp;</a></p><p>‍ <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/what-are-the-benefits-of-a-personal-loan">3. What are the benefits of a personal loan?&nbsp;</a></p><p>‍ <a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/how-to-get-good-interest-rates-on-personal-loans">4. How to get good interest rates on personal loans&nbsp;</a></p><p><a target="_blank" rel="noopener noreferrer" href="https://fi.money/blog/posts/how-to-get-a-personal-loan-in-simple-steps">5. How to get a personal loan in simple steps&nbsp;</a></p>