The difference between Overdraft and Personal Loan
19 August, 2024
Synopsis
Overdraft and Personal Loan are popular methods to get access to funds.
Banks typically provide Overdrafts on certain accounts up to a fixed limit.
If you need significantly higher funds, you can consider applying for a Personal Loan.
Imagine that you have just faced an unexpected medical expense or stumbled upon a great investment opportunity. In such situations, you might need quick access to funds. Two popular options in India are Overdrafts and Personal Loans. Both these financial instruments offer unique benefits and come with distinct terms and conditions.
This article explains the difference between Personal Loan and Overdraft.
What is an Overdraft?
An Overdraft is a credit facility extended by a bank to you, as an account holder, allowing you to withdraw money beyond your account balance, up to an approved limit. Banks typically offer overdraft facilities to their savings account holders, current account holders, and against fixed deposit accounts.
What is a Personal Loan?
A Personal Loan is an unsecured loan that is provided by banks and non-banking financial companies (NBFCs) after assessing a borrower’s income and creditworthiness. You can apply for Personal Loans for various purposes, like medical emergencies, home renovations, weddings, debt consolidation, etc.
The difference between Overdraft and Personal Loan
To accurately assess the type of funding to choose, a Term Loan vs Overdraft comparison is vital:
Purpose and Flexibility
Overdraft: It is ideal for meeting short-term and unexpected financial needs due to its flexible nature. You can withdraw funds as needed and repay them as per your cash flow.
Personal Loan: This is suitable for planned expenditures and larger financial requirements. Lenders usually provide a lump sum amount, which you can repay in equated monthly instalments (EMIs).
Interest Rates
Overdraft: The lender charges interest only on the utilised amount from the total amount released. You don’t have to pay interest if you don’t use the funds at all.
Personal Loan: Interest is charged on the entire loan amount from the date of disbursal. The interest rate levied typically depend on the chosen repayment tenure.
Repayment Terms
Overdraft: There is no fixed repayment schedule that you need to follow. You can repay the borrowed amount as per your convenience.
Personal Loan: You must follow the fixed EMI repayment structure as not doing so and missing EMIs can lead to adverse consequences.
Accessibility
Overdraft: It is easier and quicker to access if linked to an existing account, making it suitable for immediate financial needs.
Personal Loan: It requires an application and approval process, which can take a few days, which makes it ideal for planned expenditures.
Credit Limit
Overdraft: The limit is determined by the bank based on your account history and creditworthiness.
Personal Loan: The loan amount is determined by the lender based on your income and credit score.
When to Choose an Overdraft?
Following are instances when you can opt for an Overdraft:
It is ideal for meeting urgent, short-term financial needs due to its flexibility and easy access.
It is suitable for individuals or businesses with fluctuating income, allowing them to manage temporary cashflow issues.
It is effective if you can repay the borrowed amount quickly at low interest costs.
When to Choose a Personal Loan?
Following are instances when you can opt for a Personal Loan:
It is best suited for planned, significant expenditures like weddings, home renovations, etc.
It is useful for consolidating multiple debts into a single loan with a structured repayment plan.
It is ideal if you have a stable income, which enables you to repay fixed EMIs comfortably.
Get An Overdraft Or Xpress Personal Loan From HDFC Bank As Per Your Need
When you need funds during an emergency, whether in the form of an Overdraft or Xpress Personal Loan, you can always reach out to HDFC Bank. At HDFC Bank, we offer a plethora of credit facilities, enabling you to manage your urgent and planned financial expenses effortlessly. Simply visit our website, review our products, and apply for the loan/overdraft online.
*Disclaimer: Terms and conditions apply. The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Personal Loan at the sole discretion of HDFC Bank Limited. Loan disbursal is subject to documentation and verification as per Bank’s requirement. Interest rates are subject to change. Please check with your RM or closest bank branch for current interest rates.
