An overdraft loan means borrowing capital from a bank. When you avail of such a loan, a bank or lender extends your credit line to you at a specified interest rate. However, unlike personal loans, where you receive a full loan amount upfront, in an overdraft facility, you can withdraw as much as you require within the approved limit. According to the reports of the Consumer Financial Protection Bureau, in 2023, overdraft fees were approximately $1.8 billion lower than in 2022, a 24% decrease.
For instance, you have an overdraft facility of Rs 5 lakh from your bank. Now, it provides flexibility to withdraw any amount. Suppose it is—Rs 1 lakh, Rs 3 lakh, or even Rs 10,000—whenever required. Ensure that the overall amount is within the approved limit.
When you require funds either for business or personal needs and don’t have any savings to use, then your only saviour is to borrow. The dilemma is between taking a personal loan or getting yourself an overdraft (OD) facility. Let’s try to understand what these loans are and which one of them suits your needs.
Personal loans
Personal loans need no introduction. It is an unsecured loan that you can easily get from a bank. The loan tenure as well as the rate of interest are fixed. Therefore, you get to understand your equated monthly instalments (EMIs) already in advance.
For instance, consider taking a personal loan of Rs 5 lakh at 12 percent for a period of 3 years. After calculating, it is given that the monthly EMI will be Rs 17,510.
Difference between a personal loan and an overdraft?
Personal loans and overdrafts differ on various levels. To further understand this, the following are certain distinctions you need to know about:
| Personal loan | Overdraft loan |
| The interest is calculated for every amount on the overall loan amount.
For instance, if you avail of a Rs 5 lakh loan, then the interest is calculated on the total amount. |
The interest is calculated only on the amount withdrawn and not the overdraft limit.
For instance, if you avail of a Rs 5 lakh loan and use only Rs 3 lakh, then the interest will be only charged on the amount used. |
| The rate of interest is much lower as compared to the overdraft loan. | The rate of interest is much higher as compared to the personal loan.
However, if it’s a secured overdraft against a fixed deposit, then the rates are much lower. |
| The tenure of a personal loan is predetermined. | The tenure of an overdraft facility doesn’t have a fixed duration. You can continue to withdraw and repay monies within the approved limit as long as the bank renews your overdraft facility. |
Personal loan or overdraft: which is better?
The answer is based truly on an individual’s requirements. Various factors are responsible, including how much money is needed and how much is available via personal loans and overdraft loans. Other factors are the types of equipment, interest rate, etc.
However, overdraft facilities are known for flexibility and faster access to required funds, though at higher interest rates, especially for unsecured overdrafts. In addition, overdrafts are better suited for a shorter period. Mostly in cases where you require funds for temporary liquidity crunches or working capital requirements.
On the other hand, a personal loan is more appropriate for longer durations. It is considered more structured. Personal loans enforce disciplined repayment per a fixed schedule.
Conclusion
To sum up, both personal loans and overdraft facilities should be used with caution. A proper assessment of personal needs and requirements can help you understand better which is a better loan for you. Both are methods of borrowing. Henceforth, it goes without saying that one should borrow only for actual needs. Do not borrow for your non-compulsory expenses, even though you may be tempted to do so every once in a while.
