Finance

Overdraft Facility vs. Personal Loan: Which One is Better?

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When you need money for an emergency, you could look at availing an overdraft facility against your deposits or procure a personal loan. Overdraft facility will be a suitable option when you need smaller amounts for a shorter duration of time. Personal loans can offer you larger amounts for a longer duration of time, based on your financial credibility and your income. If you are looking for flexibility in terms of repayment of your loan, you could avail a flexi personal loan.

When there is a financial emergency, a personal loan or overdraft facility are ideal options to meet your requirement. Whether you choose a personal loan or avail an overdraft facility, would depend upon the exact nature of your requirement. It is essential to understand both these products in their entirety before you can make a choice between the two.

Overdraft facility

This is a facility offered by financial institutions to existing savings bank account holders. This facility allows account holders to withdraw amount from their account even after the account balance falls to zero. For example, if you are a savings bank account holder with Rs.2,00,000 in your account, and the overdraft limit is Rs.1,00,000. You can withdraw up to Rs.3,00,000 from your account even though your account balance is only Rs.2,00,000.

You can also take an overdraft by keeping your fixed deposit as collateral. In such cases, the overdraft amount would be lower than the fixed deposit amount. The interest charged on such overdraft would be higher than the FD interest rate.

Personal loan

A personal loan is an unsecured loan offered by financial institutions. Personal loan eligibility is dependent on the credit rating of the applicant and his repayment capability. Personal loans come with tenor up to 5 years which may be extended to 7 years in certain cases. Personal loan interest rate depends upon factors such as your income and your relationship with the lending institution.

Personal loan vs. Overdraft

Repayment terms

One of the major features in favour of overdraft facility is that the repayment terms are flexible and can be done at the discretion of the borrower. Personal loans come with fixed repayment terms -EMIs are fixed and need to be paid on time. However, Flexi Personal Loans come with flexible repayment terms and can be repaid as and when the borrower chooses. Flexi Personal Loans carry no prepayment penalty.

Loan Tenor

Overdraft facility is available for shorter duration as compared to personal loans. Personal loan tenor is 5-7 years. When you require funds for a longer duration, a personal loan would be the ideal option.

Amount required

Overdraft facility comes with restrictions on the maximum amount that can be withdrawn. In case of personal loans, your eligibility depends upon your income, your credit score and your relationship with the lending institution. You can check your eligibility using the personal loan eligibility calculator. If you have a stable income and a good credit rating, you will be eligible for a higher personal loan amount. If you have a requirement for larger amounts, a personal loan is the obvious choice.

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