How is an Overdraft Facility Different from a Personal loan?

In the modern-day world of ever-increasing competition, it has become exceedingly important for banks to retain their existing customers while attracting new ones consistently. Amongst other marketing techniques deployed by the leading banks to this end, there is also a special type of credit that they offer. This credit is known as the overdraft. While a Personal Loan is a conventional form of credit that requires a distinct application supported by the wide range of documents, an overdraft is a convenient facility, which can be used as and when needed, without much hassle.

An overdraft can essentially be viewed as a short-term loan, which allows the bank customers to withdraw an amount greater than their bank balance. Considering your bank offers you an approved overdraft limit of 1 Lakh. Hence, if you have 5 Lakhs in your account, you can withdraw up to 6 Lakhs, if need be.

In a vast majority of cases, overdraft facility is only made available when:

• The customer enjoys high creditworthiness.
• The customer opts for the facility against an existing Home Loan, car loan, or any other loan type.
• The customer takes the facility by putting up their fixed deposit as collateral.

When it comes to the interest levied on this loan type, it is either similar or higher than that applied on Personal Loans, all thanks to the little or no documentation required for the processing of this loan, in addition to the enhanced flexibility of repayment terms.

The amount used as overdraft can be repaid in the form of fixed equated monthly instalment (EMI) or in full as per the convenience of the borrower. Since there are no prepayment charges levied on this credit type once can pay off the loan at the earliest possible, to save on the interest outgo.

Is Overdraft Different Than a Personal loan?

Difference in Structure

Yes, of course. A Personal Loan can be called a structured credit, which needs due diligence, a higher amount of documentation, complete with proofs of identity, address as well as income. On the contrary, Overdraft facility doesn’t require the borrower to offer any additional documentation, other than that already submitted at the time of the opening the account in the bank.

Difference in terms

When it comes to Personal Loans, once you have filed the application, and the loan is approved and disbursed in your account, you will be required to pay EMIs including the interest, whether you use the loan amount or not.

In the case of an overdraft, you only pay back, what you withdraw and use. Hence, if you don’t use the overdraft facility for an entire year, not only do you exhibit excellent financial health, but also benefit from not mandatorily paying interest over a loan that you may or may not be putting to good use. Since prepayment charges are high in case of Personal Loans, often ranging from 1 to 5% of the outstanding loan amount, you may not be able to pay off your mortgage, earlier than its tenure, as it wouldn’t be as cost-efficient.

That being said, a Credit Card often proves to be better than an overdraft, since the card allows the same range of credit, and also offers a 15-45 days interest-free period which isn’t that case with overdraft as it starts accruing interest right from the day you withdraw the amount.

Difference in Amount

The Reserve Bank of India (RBI) guidelines mandate banks to cap the overdraft facility at 50,000 per week for cash credit as well as for current accounts. However, personal accounts are exempt from this rule, and depending on the bank’s own guidelines, one can conveniently get an overdraft of up to 4 Lakhs.

When compared to Personal Loans, however, this amount is rather low, as most lenders offering Personal Loans are willing to provide a credit of up to 25 Lakhs, with some even offering an amount as high a 50 Lakhs.

Simply put, an overdraft is an excellent alternative if you are looking for a short-term credit without much documentation. If you are in need of a comparatively more substantial sum of money or would need a more significant amount of time to repay the loan, an Unsecured Personal Loan will do the trick for you!