Personal loan vs. Overdraft: Which one is better?
Overdraft is an extension of credit provided to current and savings account holders in cases where the total balance of the account becomes zero or the balance required to fund the purchase is less than the purchase amount. Then the holder can continue to withdraw money from the account for a short period. The overdrawn amount is assigned a limit depending on the customer and the bank and the relationship they share; the amount ‘overdrawn’ is subject to a fee or an interest rate.
The worst part about emergencies is their unpredictable nature. You may require large amounts of funds in an emergency. You have two options when you need to borrow funds from banks: an overdraft or a personal loan.
What is better, a personal loan or an overdraft? Let’s look at the differences between an overdraft and a personal loan and determine which option is best for you in your financial crisis.
Overdraft vs. Personal Loan
Is an overdraft better than personal loans? Or is it the reverse? To make informed decisions, you need to understand the differences. This is how an overdraft compares to a personal loan.
Definitions
A personal loan can be used to borrow a fixed amount from the bank. It is available to individuals or companies to withdraw an amount beyond the current balance but not exceeding a certain credit limit.
Source and type of funds
Personal loans are a loan of capital. They can be unsecured or secured. This loan is typically used to meet an immediate financial need, but the benefits of repaying it over a longer period are significant.
On the other hand, Overdraft is a credit facility that offers short-term repayment terms.
Interest Calculation
Personal loans have variable interest rates calculated monthly and charged on the total loan amount.
The overdraft interest rate is calculated daily and charged for any overdrawn amount. No interest will be charged if you don’t overdraw any amount. The interest rate for an overdraft is also higher than for a personal loan.
Speed of Disbursal
After vetting the applicant, personal loans are approved, verifying the documents and final approval. This process may take from a few hours up to several days.
Overdraft funds can be available in hours or up to one day.
Repayments
The bank repays personal loans via easy monthly EMIs. These EMIs are usually made via direct debit. With the personal loan EMI calculator, you can calculate your EMI.
However, repayments of funds taken out of an overdraft facility must be made through bank deposits to the account.
The Loan Tenure and the Applicable Charges
Personal loans typically have a repayment term of between 2 and 5 years. Personal loans may also have additional prepayment fees and processing fees.
An overdraft facility does not have a fixed repayment term. Bank overdrafts are free from additional fees, such as processing or prepayment fees.
It is important to understand the differences between an overdraft loan and a personal loan to make informed decisions.
