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The News God > Blog > Business & Finance > Overdraft Vs. Personal Loan: Know Which Is Better?
Business & Finance

Overdraft Vs. Personal Loan: Know Which Is Better?

PAUL CARROLL
Last updated: February 4, 2023 8:23 am
PAUL CARROLL
November 28, 2022
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Gathering funds in a jiffy when a crisis hits you is not easy. You can only prepare sometimes. We can need money at odd hours for many things. But where to arrange them? Going to the informal sector to acquire funds might be fast though it comes with higher interest rates and risks. Friends and families can be a good help, but even their resources are limited and might not suffice for your needs. In such times going to banks and other formal credit systems appears to be a better choice. While considering approaching a bank for some aid, your go-to options are Personal Loans and Overdrafts. Banks, in current times, offer instant personal loans as well as overdraft facilities at lower interest. Now, the question that remains is choosing between two personal loans or overdrafts. Both have their merits and demerits. This article will discuss the features of both credit systems that you can use to compare the two.

Contents
What Are Personal Loans and OverdraftsComparisonWorkingCalculating Interest Impact On Credit ScoreRepaymentLoan Tenure Conclusion

What Are Personal Loans and Overdrafts

Personal loans and overdrafts are two of the many ways through which banks lend out money. Banks often offer their money to their customers as loans and overdrafts.

Personal Loans are a lump sum amount of money that borrowers can loan out from a bank for any not pirated personal purpose. Banks nowadays offer to take up online personal loans at the tips of your fingers and fingers.

Overdrafts, on the other hand, are a facility to withdraw money over the limit of your available balances up to a certain limit. They are better for short-term money requirements as their interest is calculated daily and is rather high.

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Comparison

Working

  • Personal Loan: This type of credit is provided by the banks to be used for any kind of requirement for money. Banks offer personal loans of different amounts that the borrower needs to repay over the tenure of the loan, along with the interest that has accumulated over time.

There are a few types of personal

  1. Secured Loans – Secured with collateral; thus, the limit is greater.
  2. Unsecured Loans – No collateral is needed, but the limit is low.
  3. Variable Loans – The interest rates may change based on different factors.
  4. Fixed Loans – The interest rate is fixed over the tenure.

Borrowers can apply for instant personal loans. The process involves eligibility checking, submitting the documents, verification, and then approval which can take a few hours to a few days.

  • Overdrafts: When taking overdrafts, you can withdraw money from your bank account more than the balance you have up to a certain limit. This limit needs to be fixed by you and your bank beforehand when you apply for availing the overdraft facility. Overdrafts don’t take a lot of time as they just use your bank account as the credit account, and verification has been done beforehand. Overdrafts usually take from a few hours to a maximum of one day.

Calculating Interest 

  • Personal loans: The interest calculated depends on the type of loan taken. For Variable loans, the interest rate might change according to the directions of a central authority or due to other factors too. If you apply for an instant personal loan with fixed interest, only a certain amount of interest needs to be paid on every installment, which does not change with time. A compound interest is calculated monthly on the total loan amount. It is repaid in installments. They have low-interest rates, from 5% to 10% per annum.
  • Overdrafts: The interest charged depends on the excess money that you borrow. Only the amount overdrawn is used to calculate the interest in overdrafts. Interest is calculated daily. The interest rate is a little high in comparison with a personal loan.

Impact On Credit Score

  • Personal Loans: Your behavior in repaying the loan affects your credit score. The score is fine as long as you don’t miss any installments and repay the loan within the tenure. It decreases missing repayments. If you apply for an instant loan and repay it in time, your credits can improve too.
  • Overdrafts: Since they are also a form of credit, they contribute to your credit score. If you close an account with an overdraft service, you might affect your credit score.

Repayment

  • Personal Loan: A personal loan online repayment is made to the bank through monthly EMIs through a direct debit. You can calculate the EMI you want to pay based on your financial conditions. Less EMIs stretch the tenure for longer durations incurring greater interest. Higher EMI can lower the interest but might take a big bite from your pocket every month. You should pay the EMI that you want to pay thoughtfully. 
  • Overdrafts: To repay the overdraft credit, you just need to add funds to your account. The funds will cover the overdrawn amount and the incurred interest. 

Loan Tenure 

  • Personal Loan: The tenure of a personal loan is usually between 2 months to 5 years. Many banks offer benefits if you take online personal loans through their mobile applications or websites. Charges like prepayment fees, processing fees, and platform charges if you apply for an instant personal loan online are also payable for personal loans. The principal amount, duration, interest rates, and EMIs are all deciding factors in the tenure of your loan. You can shorten the tenure by repaying the loan with larger EMIs.
  • Overdraft: The tenure of repayment for overdrafts is not fixed. The borrower can repay at their convenience. Since it is an instant loan, the interest is calculated daily. Stretching the repayment for a long might put you at a loss.

Conclusion

One might get in need of money at any time. Searching for funds at the eleventh hour is troublesome. When you decide to get credit from banks, you need to pick between personal loans and overdrafts. Each one has its own benefits. You can get instant personal loans from banks with low-interest rates, or you can opt for overdrafts to manage your short-term monetary requirements. Based on the loan types, their working, interest rates, and the repayment methods, you can compare the two credit methods and choose the one that suits your needs.

Complete Loan Solutions Company is a reliable provider of same-day loan services. By partnering with leading banks, financial institutions and lenders, they provide competitive rates and customised loan packages that meet customers’ exact requirements.

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