Personal Loan vs Overdraft Facility: The Better Option?

When in need of immediate funds, banks offer two significant facilities. You can apply for a personal loan (an unsecured loan granted without any collateral) based on your credit score and income level. You can alternatively opt for a line of credit using which you can borrow money via the bank’s current account. In this case, there is a limit on the amount one can borrow.

 

While both options can fulfil your requirement of immediate funds,  one needs to weigh them against each other before opting for any of them. Here's a quick look at the basic paradigms of both.

 

Simplicity and Immediate Access to Funds

 

A personal loan application comes with basic paperwork requirements and the application goes through a strict evaluation based on your KYC details, credit score etc before the final approval.  Disbursal of the loan amount takes place only after your loan is sanctioned with proper channels. The same procedure is to be followed everytime, in case a need arises for additional funds.

 

An overdraft account is comparatively faster. The funds are sanctioned within couple of hours or one working day post setting up of an overdraft account. Here, you do not need to apply again in case of additional fund requirements.

 

Flexibility

 

In case of personal loans there is very narrow room for flexibility. EMI payable periodically on the loan amount is calculated on the basis of interest rates and the loan tenure. In case of late payment, a late fee is imposed, affecting one's credit score adversely.

 

In an overdraft however you can use as much money as required within your overdraft limit, at your convenience. Repayment options are quite flexible - letting you choose to pay the debt over days, weeks or months based on your preference. 

 

Rate of Interest

 

Interest charges start building up as soon as your loan amount is disbursed in a personal loan. Even if you are not using the amount, interest is charged over the whole loan amount based on specific interest rates. In case you want to prepay your person loan, additional charges are added along with the principal amount and interest charges.

 

In an overdraft account, the interest charges are payable only on the amount you have actually withdrawn out of your credit limit. In case of a prepayment, no additional costs are levied

 

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