What is the difference between Personal Loan and Overdraft?
There are two forms of debt that a bank or financial institution extends to its customers. In case of emergencies, an individual may require immediate funds so he turns to the banks for help. The banks generally help people to raise debt through either personal loans or overdrafts. It is very important for people to understand both the essence and the difference between the two in order to decide which option they would like to choose as per their needs. Hence, the issue of personal loan vs overdraft needs to be addressed carefully. Must Post: Tom Von Reckers
Key differences between personal loan and overdraft
The first question that one should ask during the personal loan vs overdraft question is which is the better option between the two. In order to determine that, you need to thoroughly study the differences between the two. So, here is an overview of overdraft vs personal loan:
Definition
The first and foremost point differentiating the two terms is their respective definitions.
A personal loan is a credit facility that a bank/NBFC extends to a borrower so that he/she may fulfill his/her immediate long-term needs. The borrower needs to repay the debt within a certain period of time on which the bank levies a certain rate of interest. Generally, a personal loan does not require the borrower to keep any security as collateral while he/she procures the loan. Also, anyone can encounter unforeseen events that require instant funds, therefore it is necessary to know about the types of personal loans that are provided by lenders.
On the other hand, an overdraft facility is defined simply as a mutual agreement between the bank and its customer whereby the former allows the latter to withdraw an amount that is in excess of what is available in his/her account currently. This facility hinges solely on the creditworthiness of the customer in question.
Imposition of the rate of interest
Financial institutions generally predetermine the interest rate on a personal loan at the time of its approval. The lender imposes an interest rate as a variable on the loan amount that the borrower must repay.
On the other hand, if there is no withdrawal of funds from the bank account in case of an overdraft facility, then the borrower need not pay an interest rate. However, keep in mind that if you make any withdrawals, then you have to pay the interest rate. In such cases, the interest rates tend to be higher than that on personal loans.
Repayments
In the case of a personal loan, borrowers make the repayments through EMIs (Equated Monthly Installments). Some lenders also offer auto-debit and reminder features to repay the loan. Plus, lenders can also set other modes for borrowers to repay their personal loans.
However, in the case of an overdraft facility, the borrower makes the repayments at his discretion or through bank deposits in his/her account.
Credit limit modification
In the case of a personal loan, the borrower determines the amount of the loan before applying for it. After the bank sanctions the amount, the borrower needs to repay the same. No one can change the loan amount even if the borrower wishes to.
However, in the case of an overdraft facility, it is up to the borrower to choose what amount of funds he/she needs for their current requirements.
Time of disbursement of funds
Personal loans involve the lender taking several steps in vetting the borrower as per his job stability, current income, employment history, expenditure patterns etc. Additionally, the lender has to check whether the borrower meets their eligibility requirements and ensure that if he does, he must submit the documents carefully. Due to all these processes, a personal loan can only disburse funds to the borrower within a few days.
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All such hassle need not be undertaken in an overdraft facility as the borrower is already a part of the bank’s customer base, which ultimately means that the funds are in the hands of the applicant within a matter of a few hours or a day.
Repayment tenure
The repayment tenure of a personal loan is generally 5-7 years which depends on several factors and the tenure quantum. This repayment tenure is justified as these loans carry a lower rate of interest.
Overdrafts carry a shorter repayment tenure as the interest rate charge is much higher than personal loans.
Type of funds
Personal loans are unsecured capital that an individual borrows from a lender. These loans offer a longer period of repayment and a lower interest rate to the borrower.
An overdraft is a credit facility and involves a comparatively shorter period of repayment and higher interest rates.
After reading this article which option facility did you like the most? Well, we leave that for you to decide. However, make sure you consider all the points before picking an alternative. You can also ask the experts of the leading lending institutions to help you with the right choice.