Press "Enter" to skip to content

Difference between Overdraft facility and Personal Loan

During the time of a financial crisis, banks provide two options for financial assistance. You can choose from a personal loan or an overdraft facility. You can opt for a personal loan that is unsecured and is not backed up by any asset. You can easily apply for personal loan online and check for all the necessary details and facts about it.

When you choose the overdraft facility, the bank allows you to borrow money from your current account, keeping an upper limit to the borrowing amount. Individuals who are seeking to borrow money from the bank should be interested in understanding the difference between a personal loan and an overdraft facility. Both loans are available for individuals and interest is charged depending on the duration of the loan tenure.

Overdraft facility is for working capital requirements like day to day expenses, a personal loan, on the other hand, is ideal for financing a marriage, travel plans, child’s education, or capital investments in context to a business.

Banks provide overdraft account facilities to customers who generally have a salary account or customers with a sound credit profile. A personal loan can be acquired by individuals who have a regular monthly income source such as salaried persons with a minimum of two years experience and for business individuals who have a minimum of two-year income tax receipt of their businesses. Both of these above loans can be acquired by putting up collateral.

The differences between Overdraft facility and Personal loan are discussed below.

Quick Fund Release

A personal loan has a lot of mandatory paperwork, including an average to a good CIBIL score, which is a must for acquiring the loan. The money gets transferred within 3-5 business days

In an overdraft facility, you are eligible to withdraw funds within the same business day as everything is managed in a quick method. Once the initial requirements are set up, the money is allocated in the current account of the customer.

Flexibility

Personal loans have fixed equated monthly instalments (EMI’s) with a specified tenure of repayment without the chances of defaulting on payments which then attracts penalties.

A personal overdraft facility allows you to borrow money according to the limits set for your current account. The repayment period can be stretched, and you can pay within days or months whichever suits you the best. You can even close the overdraft loan by paying a lump-sum.

Rate of Interest

A personal loan after being sanctioned by the bank immediately starts accumulating interest. When you pre-pay the loan amount before the end of the loan tenure, prepayment charges and interest rates on the principal is levied.

In the case of the overdraft facility, you do not need not pay interest on the money which you have not withdrawn from the overdraft account. Additionally, there are no prepayment charges in an overdraft facility. Usually, the interest rate for an overdraft account is around 8% whereas a personal loan can go up to 13% depending on the loan tenure.

Credit Score Protection

Regularly taking personal loans and repaying them will eventually start fluctuating your credit score. During payment failures and cheque bounces, there is a high risk of your CIBIL score going down. Opting for an overdraft facility these types of payment failures will not be an issue because you will be regularly servicing a single loan account. This could also give a push to your credit scores.

Modification of Credit

In a personal loan, the credit amount cannot be modified or extended once the loan has been sanctioned. An overdraft facility will give you the advantage of withdrawing any amount of money as and when required with respect to the allocated funds.

Overdrafts accounts are acquired for short term operating expenses and loans are usually for a longer-term with higher expenses. Interest rates are often higher with overdraft facilities and the banks reserve the right to change the overdraft limit or may even request that the amount be paid back at any moment of time. Personal loans, on the other hand, has a fixed rate of interest for a fixed term of repayment. There is not much difference when it comes to comparing the interest rates of the two. An overdraft account facility charges 9.20-11.50% per annum while a personal loan interest rate will vary between 9-14% per annum. Overdrafts are more practical than personal loans. If there is a possibility where you might need multiple personal loans, you should opt for an overdraft account. However, if you require a lump-sum and want to repay for a longer period of time, you should consider a personal loan.

Be First to Comment

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.