Taking a loan is an important financial decision. When you need to take a loan, you should think carefully about what you need the money for and look at your current financial situation. There are many loan options available, but two of the most common are an overdraft facility and a personal loan. If you are weighing your short-term and long-term borrowing options, this guide will help you choose between the two (overdraft facility versus personal loan) to suit your needs.

What Is an Overdraft Facility?

An overdraft facility is a short-term credit option linked to your savings or current account. It allows you to withdraw money beyond your account balance up to a pre-approved limit. It helps cover urgent expenses or short-term cash flow gaps.

Key Features of Overdraft Facilities:

• Flexible Limit: Flexible borrowing limit based on your eligibility
• Interest: Interest is charged only on the amount utilised, not on the full sanctioned amount
• Repayment: Repayment through future credits in the account
• Security: Usually unsecured in nature. No collateral required
• Tenure: Short-term financing for up to 1 year

What are Personal Loans?

Personal loans are collateral-free loans that can be used for various personal needs and expenses, such as medical treatment, debt consolidation, home renovation, and wedding expenses. You receive the full loan amount upfront in your account to use as needed.

Key Features of Personal Loans:

• Loan Limit: Fixed amount disbursed upfront
• Interest: Generally lower than credit cards; fixed or floating rates
• Repayment: Monthly EMIs or lump sum at loan end
• Security: Usually unsecured; collateral may be required for large loans
• Tenure: Longer-term financing, typically 2 to 5 years

Overdraft Facility vs Personal Loan - Which is Better?

Now that we have understood the basics of both these borrowing options, let’s compare them across some key parameters to understand which option would be better suited for your specific financial situation and needs:

The Bottom Line

Analyse your specific needs and financial situation before deciding between an overdraft and a personal loan. For major planned expenses requiring sizable long-term financing, you can consider personal loans offered by non-banking financial companies like Shriram Finance.

Their lower interest costs through EMIs and structured repayment help make large expenses easier to manage. Avoid using the overdraft facility for longer, as higher interest costs can worsen repayment abilities. With prudent financial planning, you can optimally leverage and choose between overdraft facility vs personal loan overdraft for smooth financial management.

FAQs

1. Which one is better, overdraft or personal loan?

Whether an overdraft or personal loan is better depends on your specific financial situation and needs. Overdrafts are good for urgent small-ticket and short-duration financing needs, while personal loans work better for major planned expenses that require sizeable long-term financing.

2. Is it better to take a loan or overdraft?

For small short-term needs, overdrafts may be more suitable and cheaper due to lower processing fees. For major long-term financing like home renovation or higher education, personal loans offer lower rates through EMIs and structured repayment plans.

3. Why is overdraft cheaper than loan?

Overdraft facilities have lower processing fees and charges compared to personal loans. However, the interest cost tends be higher for overdrafts in the longer run.

4. What is the interest rate of an overdraft loan?

Overdraft facility interest rates typically range from 11% to 24% and tend to be variable in nature, depending on the lending institution and prevailing market rates.

5. What happens if I can’t pay my Overdraft?

If you are unable to service the overdraft facility and pay the accrued interest amount, the financial institution can charge penalty interest. It may also recall the facility or convert it into a loan with EMIs to regularise repayment.

6. Is a bank Overdraft a current liability or a long-term liability?

Bank overdrafts are considered current liabilities as they are payable on demand. Their flexible nature makes them a short-term financing option, unlike long-term loan obligations.

7. Which type of account is a Bank Overdraft account?

Bank overdrafts are usually linked to a savings account or current account held with the bank to provide easy access to additional funds on demand through the account.