How is an overdraft facility different from a personal loan?

 The worst thing about emergencies is that they are unpredictable. Sometimes it is impossible to be prepared for it. We can need large amounts of money at short notice. In situations like these personal loan or personal loan overdraft facility is a great option. But before opting for any of these you should know what is the difference between them so that you can decide which one is best for you. Below we have given a detailed comparison between overdraft facilities and personal loans so that you make the correct decision that can help you in times of emergencies.


Personal Loan Overdraft Faciliy
Personal Loan Overdraft Facility 

What is a Personal Loan

A personal loan is a type of unsecured loan provided by financial institutions, such as banks or credit unions, to individuals for various personal purposes. Unlike secured loans, personal loans do not require collateral, relying on the borrower's creditworthiness and income to determine eligibility and terms. The borrowed amount is typically repaid in fixed instalments over a specified period, including interest and any applicable fees. It offers flexibility in usage, ranging from debt consolidation, home improvements, and medical expenses, to vacations, making it a versatile financial tool for meeting immediate financial needs. The interest rates and terms may vary based on the borrower's credit score and the lender's policies.

What is an Overdraft Facility

A personal loan overdraft facility is a financial arrangement provided by a bank or other financial institutions that allows an account holder to withdraw or spend more money than is available in their account. It serves as a line of credit linked to the account, permitting temporary negative balances up to a specified limit. Interest is charged on the overdrawn amount, and there may be additional fees associated with using this facility. It provides flexibility for managing short-term cash flow needs, but account holders are expected to replenish the negative balance promptly to avoid ongoing interest charges.

Personal Loan Vs. Overdraft Facility

Interest Rate

When the bank approves the personal loan, a predetermined rate of interest is applied to the loan amount. If you do not withdraw any money out of your bank account while using an personal loan overdraft facility, no interest is charged. In contrast to a personal loan, an overdraft facility has a higher rate of interest.

Modification in Credit limit

When you apply for a personal loan, you and the lender decide on a specific loan amount. The loan amount cannot be changed once it has been approved. On the other hand, if you are using the overdraft facility, you are free to withdraw whatever amount of money as need.

Tenure

Depending on the amount of tenure and a number of other criteria, the repayment period for a personal loan may last up to 5-7 years. However, because an overdraft facility has a higher rate of interest, the repayment period may be shorter.

Mode of Repayment

When obtaining a personal loan, the lender may provide an EMI schedule or another format for payments. However, in the case of an overdraft facility, the repayment will be at the discretion of the applicant.

Prepayment Charges

It's important to be aware that the bank may charge a prepayment fee if you take out a personal loan and decide to pay it off before the repayment period starts. However, if you use an overdraft facility, there is no prepayment fee assessed.


  
                                      Personal Loan Overdraft Facility

Conclusion 

While both an overdraft facility and a personal loan offer financial flexibility, they differ in fundamental ways. An overdraft facility is a revolving line of credit linked to a bank account, allowing the account holder to temporarily overspend up to a specific limit, with interest charged on the overdrawn amount. On the other hand, a personal loan is a lump sum borrowed from a lender, typically with a fixed repayment term, interest rate, and a defined purpose for the loan. A personal loan requires a formal application process and credit assessment, while an personal loan overdraft facility is often pre-approved or offered to account holders based on their banking relationship. The choice between the two depends on the individual's financial needs, repayment preferences, and purpose of the borrowing.


Original Source:- How is an overdraft facility different from a personal loan?




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