Personal Overdraft Loan vs. Personal Loan

Last Updated: 14 Oct 2024

During emergency or unforeseen situations, you may find yourself in need of significant financial funds on a short notice. When seeking to raise funds via banking channels, there are two choices: a personal loan and an overdraft loan. Now, the question arises: which option is better – an overdraft or a personal loan? To choose the most suitable choice for handling your financial emergency, let’s delve into the distinctions between an overdraft and a personal loan.

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What Is a Personal Loan?

Both Non-Banking Financial Corporations and banks offer unsecured credit facilities known as personal loans. These loans do not require any collateral to be pledged. Recently, personal loans have gained significant popularity as a means of accessing funds swiftly. The loan amount available can vary based on factors like your income level, credit score, age, the chosen financial institution, and similar considerations. Lenders charge interest on the borrowed amount in exchange for providing you with the funds. You are then required to repay the principal loan amount and the accrued personal loan interest rates through Equated Monthly Instalments (EMIs) over a chosen tenure.

What is an Overdraft Loan Facility?

A bank provides an overdraft loan or personal overdraft loan as a facility that enables customers to withdraw a specific sum of money, even if their bank account lacks sufficient funds. It functions as a line of credit extended by the bank to customers, determined by their business activities, transaction frequency, and average monthly and annual account balance. It’s important to note that banks apply interest charges on the overdraft amount, although the interest rates are lower than those associated with personal loans.

Difference Between Overdraft Loan and Personal Loan

Basis of Difference	Personal Loan	Overdraft
Availability	You must undergo extensive verification and provide the required documentation to obtain an online personal loan.	Choosing the overdraft facility eliminates the need for extensive verification. Banks allow their existing customers to withdraw surplus funds as debt based on their account performance.
Debt Limit	Due to their longer repayment periods, personal loans generally offer higher loan amounts than overdrafts.	The overdrafts’ debt limit is typically lower than personal loans due to their shorter repayment periods.
Interest Rate	Personal loans carry a fixed interest rate, usually lower than the interest rate associated with overdrafts.	The interest rates applied to overdrafts are generally higher than those associated with personal loans. Consequently, individuals often prioritize clearing their overdraft debt promptly to avoid the burden of accumulated interest.
Tenure of the Debt	The tenor of personal loans is typically long, extending up to 5 to 7 years.	The tenor of the Overdraft Facility is typically shorter, often being cleared within a year.
Repayment	The bank determines a fixed Equated Monthly Installment (EMI) in a personal loan based on the interest rate, tenor, and principal amount. This EMI needs to be paid every month.	Repayment of the overdraft facility can be made at any time. There is no obligation to repay the overdraft debt within a specific timeframe, providing flexibility to settle the debt according to your preference.
Pre-Payment Charges	If you intend to repay your personal loan before the scheduled tenor, you must pay pre-payment charges to the bank. These charges can vary from one bank to another, depending on your relationship with the bank.	No additional charges are imposed for prepaying the Overdraft facility. You can clear your debt at any time without incurring any extra fees.

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Conclusion

By now, you have identified the significant distinctions between personal loan and overdraft, gaining a clear understanding of both types of debt. If you anticipate being able to repay the borrowed amount within a shorter time frame, opting for the personal overdraft loan would be suitable. However, if you prefer a longer duration to settle your debt, a personal loan would be a more appropriate choice. The decision ultimately lies in your hands, and you should select the type of debt based on your specific requirements.