While looking for loans, you will come across two types of products – personal loans and overdraft facility. It is important that you understand the difference between these two products and then decide which one will be suitable for you.
What is a personal loan?
A personal loan is a product where the bank lends a certain amount of money to an individual or an entity for a certain period of time so that the latter can meet their expenses. The loan amount has to be repaid within a certain period of time on which the bank levies a rate of interest. In most of the cases, the applicant may not be required to provide any collateral in order to avail a personal loan from the bank.
What is an overdraft facility?
An overdraft facility is nothing but an agreement between the lender and the applicant where the latter is allowed to withdraw money in excess of what is available in their bank account. The line of credit offered is based on the balance the account holder has in their bank account.
Differences between Personal Loan and Overdraft Facility
- Availability: In order to avail a personal loan, then you will have to submit the necessary documents while applying for one. Once the bank disburses the amount to your bank account, you will have to repay the loan amount within a certain period of time. In case you wish to apply for another personal loan, you will have to follow the process from scratch. However, this is not the case when it comes to overdraft facility. Once you have applied for an overdraft facility, the amount available can be withdrawn at any time.
- Interest rate: Once the bank sanctions the personal loan, a rate of interest which is pre-determined is applied on the loan amount. In case of an overdraft facility, if you do not withdraw any amount from your bank account, then no interest is charged. However, the rate of interest charged on an overdraft facility is higher as compared to personal loan.
- Modification in credit limit: When you avail a personal loan, you agree upon a certain loan amount with the lender. Once the loan amount has been sanctioned, it cannot be modified. However, if you are availing the overdraft facility, you can withdraw any amount of money based on your need.
- Tenure: The repayment tenure for a personal loan can go up to 5-7 years depending on the quantum of tenure and various other factors. However, the repayment tenure for an overdraft facility can be lower since it carries a higher rate of interest.
- Mode of repayment: On availing a personal loan, the mode of repayment is through EMI or the format stated by the lender. However, in case of overdraft facility, the repayment will be at the discretion of the applicant.
- Prepayment charges: It is also important to note that if you have availed a personal loan and wish to repay the loan before the repayment period begins, then the bank may levy a prepayment charge. However, there is no prepayment charge levied if you avail an overdraft facility.
Both the products are suitable in their own manner and based on your expenses and financial dreams you are looking to fulfil, you can decide whether you must go for a personal loan or an overdraft facility.