GUIDESPERSONAL LOANS
Overdraft vs Personal Loan: Which is Better? | Fi Money
5 MIN • 
LAST EDITED BY ANOOP MENON ON APRIL 7, 2025.
LAST EDITED BY ANOOP MENON ON APRIL 7, 2025.
GUIDES LAST EDITED BY ANOOP MENON ON APRIL 7, 2025.
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.
This is a bank account with an overdraft facility, which allows you to withdraw more than your available balance.
A bank-provided credit facility permits account holders to overdraw their accounts up to a predetermined limit.
OD Account Full Form: It stands for "Overdraft Account."
Overdrafts can be broadly categorised as:
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 Instalments (EMIs) spread across a tenure of your choice.
Understand your chances of approval 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.
| Feature | Overdraft Facility (OD) | Personal Loan |
|---|---|---|
| Nature of Credit | Revolving credit line that can be used repeatedly | One-time lump sum loan |
| Loan Amount | Variable withdrawals up to the approved limit | Fixed amount disbursed upfront |
| Usage | Flexible with multiple withdrawals and repayments | One-time disbursement for specific needs |
| Interest Calculation | Charged only on the amount utilised | Charged on the entire principal amount |
| Interest Rate | Generally variable and potentially higher | Generally fixed and potentially lower |
| Repayment | Flexible - pay interest plus gradual principal reduction | Fixed EMIs throughout the loan tenure |
| Tenure | Often shorter and renewable annually | Fixed tenure (typically 1-5 years) |
| Collateral | Often secured, sometimes unsecured for small amounts | Usually unsecured |
| Processing Time | Often faster if pre-approved | Standard loan processing time |
| Eligibility | Often requires existing bank relationship or collateral | Based on income, credit score, and repayment capacity |
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
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.
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.
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.
An overdraft facility is ideal when:
A personal loan is better suited when:
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.
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).
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.
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.
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.
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.
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.
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.
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.
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.
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