Overdraft facility vs Personal loan

Posted by Trishya Sharma on March 4th, 2020

Have you ever thought that what is better; Personal overdraft or personal loan? Before applying for a loan, proper research is a must. You should not use it for any loan just by hearing some recommendations. Look out for the best type that suits you and copes up with your requirements.

The term overdraft refers to a specific amount that you borrow from your bank in a particular set up limit. In contrast, a loan is a fixed amount that you borrow from your bank with a contract of regular settlements and repayments.

You are allowed to borrow as much money as you want at whatever time in an overdraft to a limit that was agreed between you and the bank. It turns out to be quite beneficial for your daily requirements and fulfills your regular financial needs too. The best part here is that you’ll have to pay interest only for the amount that you borrow from the bank.

However, one of the drawbacks here is that the bank can request you anytime for a payback. There is no doubt that they are incredibly flexible during the repayment period. You can quickly return the money at your convenience, and you also get to save a lot on interest rates too. 

For instance, if you have an overdraft limit of ₹1000 and you've only used ₹50, then you'll be paying interest on the ₹50 only.

To apply for a personal overdraft facility, you must be employed with a salary of ₹30,000/- per month. Once you’re eligible, the bank will finalize your amount. Few documents are required for the proof of your job and salary, but the types of materials might vary from lender to lender. Usually, the permanent account number (PAN) is required, and Passport, electricity bill, and ration card are required for address proof. Other than this, your lender may ask you to show your payslips for the past three months of the salary account and an E-NACH mandate form.  

If the lender still doesn't get satisfied, then you can show him some more proofs too. Personal overdraft is a kind of debt that can help you in paying for your planned expenses, and you can quickly refund it as you get the amount in your hands. 

On the contrary, Personal loan has fixed agreements and repayment schedules. It turns out to be less flexible than overdraft because you have to pay back on fixed timings, and if you fail to do it, you might ending getting in some financial troubles. 

Though personal loan help to plan expenditures, you have to start paying interest from the first day. The burden of interest and the less flexibility of cash flow makes it less valuable than the former. Although it helps to pay for fixed projects but not for daily needs.

Therefore, it is suggested to use overdrafts for short-term expenses, whereas loans for long term high purchases because overdraft is better for the small sum of money for a short period. In contrast, loans provide more considerable funds for a more extended period.