Overdraft or Personal Loan Which Saves More Money

In today’s time, we can encounter emergency expenses out of nowhere. These expenses could be a sudden medical bill, urgent home repair, an immediate request for a trip by your family members, or something else. Choosing the right financing tool in such cases can make all the difference, and many people get confused between a personal loan and an overdraft (OD) facility.

While both options provide quick access to funds, they differ in structure, flexibility, and repayment methods. In this article, we will do a quick comparison of a personal loan with an overdraft facility, and analyse which option is better for you.

What is an Overdraft Facility?

The overdraft facility permits you to withdraw an amount that is greater than the current account balance within the approved limit. This is a flexible form of finance and is very common when there is an emergency. It is generally linked with your savings or current account, and depending on the type, it can be secured or unsecured.

• Secured Overdraft:

If your overdraft is linked to a Fixed Deposit (FD), it will be backed by your FD as collateral. Generally, the credit limit is 85-90% of the FD value, and the interest rate is just 1-2% higher than the FD rate.

• Unsecured Overdraft:

If not backed by an FD, you will get access to an overdraft based on your income, account history, and credit score. However, an unsecured overdraft has a higher interest rate.

In the overdraft facility, the interest is charged only on the amount you use and not the entire approved limit. Thus, it is a good option for short-term borrowing.

What is a Personal Loan?

In an instant personal loan, you get access to a lump sum amount of money at once that you have to repay in fixed monthly instalments. It is often preferred for larger expenses in which structured repayment works better than the overdraft facility.

The borrower will get the entire amount at once, which makes it ideal for high-value needs such as medical treatment, education, and others. For repayment, there is a proper structure of EMIs over a pre-agreed tenure, usually of 9-60 months.

A small personal loan is mostly unsecured in nature, and thus you don’t need to pledge assets like an FD or property. The interest is charged on the full amount right from the start, regardless of how much you end up spending.

Whereas an overdraft offers revolving credit, an RBI-approved personal loan does not. In the case that you want to have access to more money in the future, then you will need to apply for a top-up or another personal loan.

A personal loan is appropriate in instances where you require a significant amount of money.

Key Differences:

You have to make quick decisions during emergencies, and for the right decision, you have to compare both options. Here is a quick synopsis of the differences:

1. Access & Approval:

In an overdraft, if your FD is already linked, then you get quicker access, while in a personal loan, you have to submit a fresh application with income proof, a loan for salaried professionals, KYC, and credit checks.

2. Rate of Interest:

In an overdraft, you pay interest only on the amount you use; however, it is generally higher than the personal loan interest rate. In a personal loan, the interest is charged on the entire amount.

3. Repayment Structure:

An overdraft facility gives a flexible repayment structure, but the tenure is short. On the other hand, a personal loan gives you an EMI-based repayment facility for a longer tenure.

4. Fund Disbursal:

Disbursal of money takes longer when one uses loans compared to using overdraft facilities. Although this process has become shorter in the recent past, there will still be some time required by the lender to check your application before approving it. However, overdraft facilities allow the user to access the required money within a few hours.

5. Time:

Loans are generally most appropriate for the long run. This repayment period may extend from 1 year up to even 5 years or beyond. On the contrary, an overdraft is a short-term financing source that works well when you need money for the short run.

Key Takeaways:

Deciding between an overdraft and a personal loan depends on your motive and employment status. If you are an individual with a good credit score and need funds for a trip, then a personal loan will be the right choice. If you're a businessman with a current account, an overdraft facility is ideal for short-term funding. For personal loan needs, apply online with Rupee112 for a quick and hassle-free borrowing experience.