Personal loan and OD : When a certain individual borrows a certain amount from the lender and pays the rent in interest, it is called a loan. The monthly instalments consist of an interest portion and a repayment portion. The repayment continuously reduces the remaining loan amount, the so-called residual debt.
Legally, a loan is a loan agreement. The debtor assures that he will repay the borrowed amount by an agreed date. The debtor pays this price, which consists of interest and other costs. But why do you need to borrow funds?
Unforeseen expenses, in particular, are often paid for with credit from banks or NBFCs. It can be certain fees, your house renovation or an unfortunate medical emergency. The simple, hassle-free processing of the loan allows you to get the financial back up promptly in the form of a Personal loan or overdraft.
What is an overdraft facility?
An overdraft is a credit facility that allows you to debit your checking account beyond your credit balance. You can avail of this facility usually free of cost.
Your regular income proof, i.e., the salary you draw, the yearly turnover of your business, or your account movement, is a decisive factor for the bank to decide on the amount of overdraft facility they will allow you.
What is a Personal Loan?
A personal loan or consumer loan is considered a preferable loan for financing personal emergencies. The following vital points characterize a classic personal loan:
- Fixed debit interest rate over the entire term
- Term between 12 and 120 months, depending on the lender
If the bank finances a personal loan, the security of the loan is assured through the assignment of salary. You must have your salary account with the bank.
The interest rate for an installment loan is well below that of an overdraft facility, but in most cases, the amount depends on the creditworthiness of the borrower.
The bank usually charges a significantly higher effective annual interest rate for an approved overdraft facility than a personal loan. Under certain specific conditions, banks charge little or no interest for the use of the overdraft facility. Comparing these two types of loans is therefore important and will save you high costs in an emergency.
5 major difference between overdraft and personal loan
1. Personal loan instead of overdraft facility
A personal loan or instalment loan is often cheaper than an overdraft facility. With a personal loan, the bank knows exactly when you pay instalments and when the loan is fully paid off due to the repayment plan. This keeps your CIBIL credit score intact and enhances your credit score.
With the overdraft facility, no such assurance exists. There is no guarantee if you are ever going to repay it. Moreover, your repayment sum increases daily if you have no control over your expenses. There is no instalment agreement or such stuff. Therefore, the risk of non-payment is lower for the bank in the case of a personal loan that comes with a proper repayment plan. Here, the bank rewards you with low-interest rates.
The repayment tenure of a personal loan is generally long, starting from 2 years to 5years.
In the case of an overdraft facility, customers are allowed to withdraw excess funds other than what is present in their accounts. There is no specific time within which you must repay the amount.
3. Rate of interest
Personal loans are provided at a predefined rate of interest decided by RBI. The interest rate in personal loans usually is lower than the overdraft facility.
Since there is no specific repayment period for overdrafts, the interest rate is high so that customers repay it back without delay, to avoid paying a massive amount of money charged as interest every month.
The documentation and verification process for personal loans are more complicated than overdrafts. Banks verify your KYC, income proof and many other things before approving the loan amount.
Banks allow the overdraft facility to their potential existing customers just after checking the credit movement on their account. The role of document verification is less vital here.
In case you want to foreclose a personal loan, that is to repay the loan before the scheduled tenure, a certain amount of foreclosure charge is levied. This charge varies from bank to bank. No such charge is applicable in case of overdraft if you want to foreclose them.
You can also use a personal loan, for example, to get out of your overdraft facility. You can set your account to zero in one go and then pay off the instalments for the rescheduling loan every month. By rescheduling the loan – i.e. balancing the overdraft facility with a conventional personal loan – you ensure a better and clearer financial situation. Comparatively, you get off the overdraft facility at a lower interest rate.
Overdraft or Personal Loan- What to choose from these two?
With the overdraft facility, you get quick access to the desired loan amount, and there is no query about your current financial or personal situation. But the disadvantages of overdraft in the form of high-interest rates weigh heavily.
- Financial planning security
You can agree on a fixed interest rate for a personal loan for the entire repayment tenure. With the overdraft facility, you cannot have this cushion. The uncertainty that the bank increases its overdraft interest rate, which will be an unpleasant cost increase for your repayment schedule, always exists. A high risk of indebtedness accompanies this fact.
- Different areas of application
The overdraft facility is unsuitable for furniture, car or consumer electronics purchases. It is intended to compensate for financial fluctuations in the account and not for expensive purchases. If your purchase expenses lose control, there will always be a risk of non-repayment on the overdraft account.
The personal loan is the better choice here. If you specify the desired purpose when borrowing, you can often save even more interest and benefit from better conditions. The reason is the intended use usually serves as collateral for the banks.
How to deal with high-interest rates
Depending on their creditworthiness, customers often pay double-digit interest rates when repaying a loan – as well as overdraft interest of up to eight per cent per year.
What can help a customer is their initiative and discipline in expenses – which is the only way to deal with the high-interest rates. For example, you should always check whether the overdraft facility is used almost exclusively for short-term financial transactions and not for medium or long-term account movements.
In the case of personal loans, you should always keep sufficient funds in your savings account two days before the loan’s EMI gets debited so that you don’t miss a single EMI or increase your penalty charge. With a personal loan, you always have an option of foreclosing it, i.e., repaying the loan before tenure to pay less interest. If you repay your loan, you will save some future costs whenever you get extra funds.
My Safe Loan to the rescue of your credit needs
With My Safe Loans for a low-interest personal loan, you can avail of quick access to an emergency fund in your credit needs, with minimum paperwork. Our loan specialists compare the loan offers from many well-known banks for you and work with you to find the most favorable personal loan.
You are entitled to pay back the money you lend to banks and that too with interest. But with the loan facility, you’ll never go out of funds in times of need. Personal loans and overdrafts have pros and cons. Make a wise choice by comparing the interest rate on both schemes while maintaining your credit score. A personal loan is always the best option, and My Safe Loan is a go-to place for ease of the process, minimal paperwork, online tracking and personal assistance. We are always there to serve you better.