Overdraft vs Personal Loan: Key Differences
When it comes to borrowing money, banks and financial institutions offer different products to meet different needs. Two of the most commonly compared options are an overdraft facility and a personal loan. While both provide financial support, they work in very different ways. Understanding overdraft vs personal loan can help you choose the right option based on your requirements.
What is an Overdraft Facility?
An overdraft (OD) facility is a credit arrangement linked to your savings or current account. It allows you to withdraw more money than you actually have in your account, up to a pre-approved limit.
- Example: If you have ₹10,000 in your account and your bank gives you an overdraft limit of ₹40,000, you can withdraw up to ₹50,000.
- Interest charged: Only on the amount you use, not on the entire limit.
- Flexibility: You can repay whenever you want, and interest is calculated daily.
This makes overdrafts useful for short-term cash flow issues or emergency needs.
What is a Personal Loan?
A personal loan is a fixed-sum loan borrowed from a bank or NBFC, which you repay in equated monthly instalments (EMIs) over a set period.
- Loan amount: Usually ranges from ₹50,000 to ₹25 lakh depending on your profile.
- Tenure: 1 to 5 years (sometimes up to 7 years).
- Interest rate: Fixed, usually between 10% – 24% p.a.
- Repayment: Monthly EMIs till the loan tenure ends.
A personal loan is ideal for planned expenses like weddings, medical bills, education, or debt consolidation.
Key Differences Between Overdraft vs Personal Loan
|
Feature |
Overdraft Facility |
Personal Loan |
|
Nature of Credit |
Flexible credit linked to your account |
Fixed loan amount disbursed upfront |
|
Usage |
Borrow as much as you need within the limit |
Borrow the entire loan amount |
|
Interest Charged |
Only on the amount you withdraw |
On the full loan amount, from day one |
|
Repayment |
Flexible; repay anytime |
Fixed EMIs over the loan tenure |
|
Tenure |
No fixed tenure, limit can be renewed annually |
1 – 7 years depending on lender |
|
Eligibility |
Usually for account holders with good credit history |
Open to salaried and self-employed borrowers |
|
Best For |
Short-term needs, irregular expenses |
Planned expenses, big-ticket requirements |
Which One Should You Choose?
- Choose Overdraft if you need quick, short-term funds and want flexibility in repayment. For example, business owners often prefer overdrafts for handling cash flow gaps.
- Choose Personal Loan if you need a larger lump sum amount for planned expenses like higher education, weddings, or medical emergencies. EMIs make repayment more disciplined and predictable.
Final Thoughts
Both overdrafts and personal loans are useful borrowing options, but they serve different purposes. An overdraft offers flexibility and is great for short-term needs, while a personal loan provides structured repayment for long-term financial requirements. Assess your financial situation and repayment capacity before deciding which one works best for you.