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.
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:
So, in the above example, you will have to pay interest on the additional ₹2,000 you spent.
Here are some of the most important benefits you can enjoy from an overdraft facility.
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.
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.
An advantage of an overdraft facility is the flexibility to repay the overdrawn amount in multiple instalments instead of a single lump sum payment.
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.
As with the overdraft facility, personal loans also have advantages. Let’s take a quick look at a few of the most important ones.
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.
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.
Another advantage is the freedom to choose the repayment tenure for your loan, typically ranging from 12 to 60 months.
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.
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.
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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.
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.
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.
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.