Most of us are able to plan our finances with ease and can handle minor expenses with ease. However, unexpected situations can arise that may require urgent funds. If you don’t have enough money, you can apply for an overdraft facility at your bank that can help prevent stressful financial situations. Many people are not aware about overdrafts, since banks generally offer this facility to select borrowers. The overdraft facility is highly useful, since it can help individuals gain monetary assistance from their bank.
Ovetdraft vs LoanSnneha Lukka July 5, 2019
What is an Overdraft?
An overdraft is a type of credit facility provided to customers of a bank. Basically, overdraft can be considered as a type of credit arrangement given by banks to allow people to withdraw extra money from their account, even if their bank balance is nil. This is a special facility provided by banks so that customers can overcome unexpected financial requirements.
How to Avail Overdraft Facility?
Customers can avail overdraft loans from their bank, either via netbanking, mobile app, or by directly applying at the bank branch. The application process of getting an overdraft loan will vary from bank to bank. In the case of netbanking or mobile app, there should be an “offers” section where you can activate your overdraft facility.
Difference between Overdraft and Loan
Anyone who requires urgent funds should know the difference between overdraft and loan. Knowing the difference between the two will help you ascertain which option is a better choice. Below are the main differences between overdraft and loan. Overdraft is a type of credit provided to individuals who have a current account with a bank. The amount which can be withdrawn by the borrower will depend on the requirement. In contrast, loans are a fixed amount that is borrowed from a bank or lender, with a fixed repayment schedule. In the case of overdraft, the interest rate is specifically charged on the borrowed overdraft amount and not on the overdraft limit amount. With loans, the interest rate is applicable to the entire amount borrowed, whether it is utilized entirely or not. Overdraft is generally accessed for a shorter time duration, and the borrower cannot borrow higher amounts due to their credit limit. Loans are accessible for a longer duration, between 6 months to 25 years, with higher sums available to borrow. For daily requirements and working capital needs, overdraft is the ideal option; loans are more beneficial for capital investments.
Process of Overdraft vs Loans
After a personal loan is approved and disbursed by the bank or lender, the borrower receives the funds directly to their account. When the amount gets disbursed, the interest levied is applicable on the entire amount. For example, if you take a loan of Rs. 20,000 then you need to pay the interest on the entire amount sanctioned, whether you use the entire amount or not. When it comes to overdrafts, you do not need to pay off the interest until you have actually withdrawn the amount. Additionally. Interest is only levied on the amount actually used, and not the entire overdraft limit. For example, if your overdraft has a limit of Rs 20,000 but you only withdraw Rs. 10,000 then the interest is applicable only on Rs. 10,000 and not on the entire limit of Rs. 20,000. Although credit cards have a grace period during which interest is not levied on the amount borrowed, with overdraft, interest is levied from the day the amount is borrowed. However, the amount that is allowed to be withdrawn in overdraft can be lower for an individual who is eligible for a higher amount via a personal loan.
Overdraft is excellent for any immediate or short-term requirements, whereas personal loans have higher borrowing limits and flexible repayment tenures. If you have an overdraft but think that you need additional funds or an extended period to repay the amount, it is much better amount to convert that overdraft into a personal loan.