When your savings account runs dry and the need for funds arises, turning to borrowing becomes inevitable. Yet, for many, borrowing from friends or family isn’t preferred.
In such scenarios, the choice typically boils down to either a personal loan or an overdraft (OD) facility. But which one offers the most benefits? Let’s delve into the comparison.
Understanding the Overdraft Facility
An overdraft facility extends a line of credit to customers by the bank. It comes with a fixed interest rate and a predetermined credit limit.
Unlike a personal loan, where you receive a lump sum, an overdraft allows you to withdraw funds up to the specified limit as needed, either in one go or multiple transactions.
Key Differences Unveiled
- Interest Calculation: In a personal loan, interest accrues monthly on the total borrowed amount. Conversely, an overdraft incurs interest solely on the withdrawn sum, independent of the total limit. No withdrawals mean no interest charges.
- Interest Rates: While overdraft interest rates generally tend to be higher than personal loans, secured overdrafts, backed by fixed deposits, might offer significantly lower rates.
- Tenure and Repayment: Personal loans come with fixed repayment tenures and structured EMIs. In contrast, overdrafts offer flexible repayment options, allowing borrowers to return funds at their convenience.
Choosing the Right Fit
Deciding between the two hinges on individual circumstances. Typically, overdrafts prove advantageous for their flexibility and quick access to funds, making them ideal for short-term needs.
Conversely, for longer-term commitments, personal loans provide a structured repayment plan.
However, both options entail debt, necessitating cautious consideration before proceeding.
By weighing the intricacies of each option, borrowers can make informed decisions aligning with their financial goals and needs.
