Overdraft and personal loans are two different credit facilities offered by financial institutions under different terms and conditions. Typically, individuals are more aware of personal loans rather than personal overdraft loans as a mode of easy credit. It is mainly due to the perception that overdraft is only available to businesses.
However, this facility is also available to the general public. For instance, the government has doubled the overdraft facility on Jan Dhan Accounts from Rs.5,000 to Rs.10,000 opened under Pradhan Mantri Jan Dhan Yojana.
What is an overdraft facility?
A personal overdraft loan is an agreement between the creditors and the borrowers, where the latter is permitted to withdraw more than what they hold in their account. In simple words, this facility allows account holders to draw money even if their account balance is zero. For instance, if an individual has an approved overdraft limit of Rs.20,000, then he/she can withdraw up to that amount after emptying the account balance. Loans are also heavily used by companies to increase their stock prices and be more profitable, that has been the case for instance of MRLDF stock.
However, this facility is not offered to everyone. Generally, it is available to customers with credible credit history.
Key differences between overdraft facility and personal loan
Even though the overdraft facility and personal loan offers quick credit solutions and attracts similar interest rates, they are very different from each other. Here are the key difference between them –
Quick availability of funds
Overdraft loans are readily available. Once the financial institution enables this facility in an account, the account holder can withdraw funds instantly.
On the other hand, the availability of personal loans is subjected to approval from the lenders.
The application process to activate an overdraft facility is a one-time process. Once, it is done, individuals can use this facility as per their convenience.
In the case of personal loans, borrowers have to go through the same application process every time. However, financial institutions offer pre approved personal loans which makes the process time-saving.
The credit limit of a personal overdraft loan varies from one person to another. Moreover, this limit is decided by the financial institutions. Thus, account holders can only withdraw the amount they are assigned with and cannot borrow more even if they have a requirement.
Contrarily, the personal loan amount is determined mutually by the lender and the borrower. Therefore, individuals have the flexibility to borrow as per their requirements.
Levied Interest rate
The rate of interest on personal loans accrued by overdraft is higher compared to that of personal loans. However, in case of an overdraft, the interest is accrued only when a borrower withdraws any amount.
Tenor of credit
The tenor of overdraft loans is shorter. With personal loans, financial institutions nowadays offer flexible tenor of up to 60 months; it makes repayment more affordable.
There is no fixed repayment procedure for an overdraft. It depends on the discretion of borrowers; they can repay as per their convenience.
However, personal loans are required to be repaid as per the guidelines of a particular lender. It is necessary to follow the pre-defined EMI format for this.
Both of these credit facilities have their advantages and disadvantages. However, if an individual is planning to avail a quick yet substantial credit without much hassle, he/she can opt for a personal loan. Bajaj Finserv, one of the most reputed NBFCs of the country, offers such credit at an attractive interest rate.
Furthermore, the company also brings pre-approved offers on financial products such as personal loans and business loans. This offer aims to make the personal loans application process smooth and time-saving. Borrowers can check their pre-approved offers by submitting their essential contact details.
When compared head to head, personal loans are a more viable mode of credit than apersonal overdraft loan. Even though overdraft facility has its benefits, the availability of a more substantial credit is one of the top reasons to apply for a personal loan.
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