A need of cash can arise anytime. When you are in urgent need of cash, you either make use of an emergency fund or arrange cash from friends or relatives. When friend or relative is unable to help you can opt for either personal loan or overdraft facility from the bank. A personal loan is an unsecured loan. It is not secured against any assets such as car loan, home loan etc. If you opt for overdraft facility it is a facility to borrow money via current account. In this post, we will compare personal loan and overdraft facility and try to get an answer which one is best and why.
- The personal loan is a loan given by the bank without any collateral. It is known ad unsecured loan.
- Income proof is mandatory to avail this loan. A personal loan is given by considering your income eligibility, credit history, and repayment capacity.
- A personal loan can be used for any purpose including medical expense, marriage expense, home improvement, purchasing household items or to pay your credit card debt etc.
- This loan is given to the salaried individual and self-employed.
- Personal loan tenure is maximum 5 years.
- Overdraft is facility provided by the bank on your account. In overdraft, you can borrow extra money from bank account.
- The interest rate levied on the borrowed amount is fixed and not floating.
- Overdraft facility is pre-approved facility provided to selected customers. Some bank requires customer application to avail this facility.
- When you opt for overdraft facility your account is flagged as an overdraft account. As soon as you withdraw extra money overdraft facility is activated automatically.
- The time required to borrow money from overdraft account is Nil.
Also Read – 5 Best Banks for Personal Loan in India
How Overdraft Facility Work?
Overdraft loan facility is like on-demand loan. In this facility, you are making an agreement with a bank to offer you extra money up to a specific limit. This limit is decided by the bank. Once this facility is provided you can withdraw extra money (over and above your bank balance). Once you withdraw extra money, it will show extra money as outstanding demand. When you deposit money, this demand amount decreases. The interest is applicable from the time you borrow the amount.
The certain bank asks for collateral such as fixed deposit, insurance policy, share certificate for availing overdraft facility.
Difference Between Personal Loan and Overdraft
Quick Fund Release and Simplicity
In a personal loan, you have to do a lot of paperwork. Every time you need money you have to do similar paperwork. Another thing is once your application is approved, it will take time to get an actual amount.
In overdraft facility, once your facility is approved you can withdraw money anytime. You need not to set up overdraft account every time you need money. It is a quick and easy way to get money.
Personal does not provide much room of flexibility. You need to pay money via equated monthly installment. Tenure of loan is fixed, and prepayment charges are applicable. This could be a problem in case you have variable income.
Overdraft facility is flexible in nature. You can avail overdraft anytime. There is no fixed repayment schedule for outstanding. You can make repayment as per your convenience.
In a personal loan, the interest is applicable as soon as you opt for loan and money get transferred. You need to pay interest, Irrespective of usage. You also need to pay prepayment fee along with the principal and interest amount due.
In overdraft account, you need not pay interest on money you have not withdrawn from your overdraft limit. No additional fee or prepayment charge applicable on overdraft.
CIBIL Score Protection
If you take personal loan frequently, your CIBIL score gets affected badly. You have to be careful in making repayment of the loan. The adverse effect to CIBIL score may cause a problem in getting a loan or credit card in the future.
For overdraft facility, you will have a single loan and you will be making regular repayment. This will help in protecting your CIBIL score.
Management of Loan
If you are taking multiple personal loans, you must remember the repayment schedule of every loan. Apart from that, it is very difficult to manage multiple loans. In overdraft, it will be single account and it will be very easy to manage it.
From the above discussion, it is but obvious that Overdraft account is a viable option compared to personal loan. However, if you avail personal loan make sure to clear your dues within time. This is to avoid prepayment penalty and adverse effect on your credit score.