Loans from banks: Know the advantages of overdraft over personal loans

We have all heard of personal loans. Banks bombard us with offers to take personal loans to buy that gadget, go on a dream vacation or even get married. However, personal loans, easy and convenient to process as they are, can be expensive since they carry high interest rates. Moreover, if you miss an EMI (Equated Monthly Instalment), penal interest can add up to push you toward very high debt servicing obligations.

In contrast, an overdraft can make life a bit easier on the loanee. There are situations when an overdraft can be preferable to a personal loan. Let’s see how an overdraft facility differs from a personal loan.

No EMIs

The most significant difference lies in the interest charged. An overdraft facility does not charge you fixed EMIs like personal loans. They will charge you only when and the amount you take out as loan from the overdraft facility. A personal loan, on the contrary, locks the loanee in EMIs which one has to keep paying according to a predetermined time schedule till the loan in extinguished. If the lender demands repayment, one has to meet its requirement.

Interest on what you take out

A personal loan transfers the full amount applied for to the account. However, in an overdraft arrangement, the bank sanctions a credit limit, from where one can withdraw as needed.

On the question of repayments too, overdrafts are less rigid and one can repay funds into the account according to one’s convenience. If the borrowing remains within the overdraft limits, the repay-on-your-terms is offered.

Who can open

Usually, an Indian citizen 21 and 65 years who has an account with a bank, a good credit score and can meet the criteria of the lending institution can have an overdraft facility with the bank.

Earlier overdraft facility was offered for current accounts (for business transactions), but now general account holders can use this facility as banks have started giving it to salary account, savings account as well as FD holders too.

Personal loans can be bigger

However, personal loans can be of a bigger amount – some banks offer Rs 30-40 lakh as personal loans. Overdrafts usually offer smaller amounts for short term arrangements.
It is advisable to speak to a personal finance advisor to decide on which one to take.