Overdraft vs. Loan - What is the Difference Between Overdraft & Loan?

There may be unforeseen times in your life when you may be in need of a sizable amount of funds at short notice. Generally, under such circumstances, you have two options that may be available if you are looking to raise funds via banking channels.

You may either opt for a personal loan in India or choose the overdraft facility if you have a current account in your bank. However, there may be a cap applicable on the amount of funds you can borrow via the overdraft facility.

What is an Overdraft loan or Overdraft facility?

An overdraft facility is a convenient financial arrangement that lets borrowers withdraw more funds than their current balance, up to a certain limit. This is a temporary solution where the bank covers the shortage and applies interest on the excess amount.

Although it typically incurs additional charges and interest, it's a useful tool for managing cash flow and unexpected costs.

When to choose an overdraft?

An overdraft can be a good idea in cases of,

• A small amount of money is needed to cater to your immediate needs.
• When you need a buffer during financial emergencies or when awaiting incoming funds.

Overdrafts should be a short-term solution due to associated fees and interest charges.

When to choose a Loan?

A personal loan can be beneficial for you in the following circumstances:

• For debt-consolidation.
• You have a defined need, e.g., paying medical bills, making major purchases, travelling, education, etc.
• You need a large sum of money.
• If you prefer a fixed interest rate and a set repayment schedule.

But before applying for a personal loan, you can use an online loan eligibility calculator and an EMI calculator to determine your personal and financial suitability. Assess your financial situation, the purpose of the loan, and your ability to meet the repayment obligations before choosing a loan as a financial solution.

Differences Between A Loan And An Overdraft

When it comes to a choice between a bank overdraft vs. a personal loan, which one should you go for? Understanding the distinctive differences between the two products can help in your decision-making process. Alternatively, there are a number of bank overdraft vs. loan that you can use to simplify the experience.

The Definitions:

A personal loan is a fixed amount of money that you can borrow from a financial institution, is unsecured in nature, and can be repaid back in fixed monthly installments with interest over a specified period of time.

The overdraft, on the other hand, is an arrangement between the individual and the bank that comes with authorization to withdraw cash that is greater than the available balance from the current account up to a certain limit. This limit is usually secured against a financial asset, like a fixed deposit. Thus, you may be able to get an overdraft limit of up to 120%-130% of your fixed deposit, depending on your eligibility and relationship with the lender.

Type & Source of Capital:

The personal loan is classified as unsecured borrowed capital whereas the bank overdraft is categorized as a credit facility. Typically, personal loans cater to meeting the needs for immediate funds but come with the benefit of long-term repayment options. Funds that are withdrawn via overdraft only offer short term repayment terms.

Interest Calculation

Personal loan interest rates are variable and are charged on the total loan amount sanctioned by the financial institution which is calculated on a monthly basis. The bank also charges interest on the overdraft facility but only on the amount of funds withdrawn from the individual’s current account. Depending on the terms, the interest calculation on an overdraft facility may be quarterly, monthly, or even daily in some cases. On the other hand, personal loan interest rates are charged annually or on a per annum basis.

Speed of Fund Release:

You have to satisfy a number of parameters including clearing a personal loan eligibility check to get a personal loan approved. This subsequently involves submitting documents, a vetting process prior to gaining approval. The entire process can take anywhere between a few hours to a few days. Funds via overdraft can be within a few hours or a maximum of a single business day, depending on your relationship with the lender.

Flexibility of Repayments:

Personal loans are repaid to the bank in equal monthly installments via direct debit that leaves no room for flexibility. Individuals can determine their monthly installments amount by using the personal loan EMI calculator available on the SMFG India Credit website. In case of bank overdraft, the individual can spread out the repayments through bank deposits as per their convenience.

Repayment Tenure & Applicable Charges:

Personal loans generally come with a repayment tenure ranging anywhere between 12 to 60 months. Subsidiary charges like processing fees and pre-closures charges may be applicable on personal loans too. Since the overdraft facility comes with a higher rate of interest, there is no fixed repayment tenure involved. Additionally, there is no processing fee or pre-closure charges applicable on bank overdrafts.

Loan vs. overdraft: Which is the better choice?

When deciding between a loan and an overdraft, your specific financial needs should be taken into account. Loans are better suited for planned expenses, such as purchasing a house or a car, as they provide a set amount with fixed repayment terms. Conversely, an overdraft offers more flexibility and is ideal for managing short-term cash flow gaps or everyday business demands.

The better option depends on whether you need a set amount for a particular purpose (loan) or adaptable access to funds (overdraft) that cater to your unique financial situation and requirements.

How To Apply For a Personal Loan?

If you have decided to go with a personal loan, the first step involves successfully meeting all the parameters of the personal loan eligibility requirements. These include

• Be a citizen of India
• Be between 21 and 65 years of age at the time of loan application
• Be a salaried employee at a private or public enterprise or demonstrate a regular source of income for self-employed individuals
• Have a minimum CIBIL score of 700

Moving on to the next stage involves:

1. Filling Out the Application Form:

Click on the “Apply now” button on this page where you will find a dedicated application form for Personal loans. Fill out all the relevant and mandatory sections with information that is accurate to the best of your knowledge.

2. Document Submission:

You will be required to submit minimal paperwork to avail of a personal loan from SMFG India Credit. The list of personal loan documents include:

• Past 3 months’ salary slips.
• Last 6 months’ bank account statements
• KYC documents that include PAN and AADHAAR card, driver’s license etc.

If you are self-employed, you will need to submit one or more of the following:

• Last three years’ income tax returns
• Last 6 months’ bank statements
• Sales tax returns
• TDS Certificate
• Company details
• KYC documents that include PAN and AADHAAR card, driver’s license etc.

The process of documentation can be carried out completely online.

3. Loan Amount Disbursed:

Select your required loan amount simultaneously with your paperwork. The SMFG India Credit personal loan team will review and verify your application form, paperwork and run a credit check on you. Depending on the success of the verification checks, they will get in touch with you to discuss terms. After the loan agreement is signed. a sanction letter will be emailed to you, and the required funds will be transferred to your account.

Generally, after loan approval, funds transfer can happen within a few hours. The entire process from application to disbursement, providing everything is in place, usually takes 1-2 working days.

Conclusion

Understanding the distinctions between an overdraft and a loan is crucial for making informed financial decisions.

At SMFG India Credit, we recognize the diverse financial needs of individuals. Our personal loan comes with a 100% paperless application process. Our loans ensure convenience, and competitive interest rates make managing your financial needs stress-free.