What is the difference between Personal Loan & Personal Overdraft Loan?

We all have faced situations when we need a sizable sum of money at short notice or even without any notice. This could be necessitated by a medical emergency, an unanticipated business need, or even an unplanned vacation. Whether you are salaried or self-employed, there are two types of loans or credit schemes that you can choose for managing your financial obligations — Personal loan and Personal overdraft loan.

A Personal loan and a Personal overdraft loan are quite different and have specific use cases. Let us check out how these two credit instruments differ.

Additional Read: What is a personal loan

Overdraft loans vs Personal loan

What is an Overdraft loan or Overdraft facility? 

An overdraft loan or personal overdraft loan is a facility offered by the bank through which customers can withdraw a certain amount of money even if there aren’t enough funds in their bank account. This is simply a line of credit offered by banks to customers based on their business, frequency of transactions, and average monthly and annual account balance. Remember that banks also charge interest on the overdraft amount, although this is not as high as the interest on personal loans.

What is a Personal loan?

A Personal loan is a financial product offered by a bank/lending institution as credit. The loan amount is disbursed to the individual for a specific period, and the borrower must repay the loan within the time limit. The bank/lending institution receives interest on the principal amount but doesn’t necessarily require the borrower to mortgage their assets such as their property, vehicle, gold, etc.

Here are some more differences — Overdraft loan vs Personal loan

• Availability

Borrowers need to provide mandatory documentation when opting for a personal loan, which is not the case with a personal overdraft loan. Taking a personal loan is a slightly lengthy process that requires the borrower to meet specific criteria and wait for the approval. A personal loan disbursal can take anywhere from 24 hours to 7 days, depending on the verification process.

On the other hand, a personal overdraft loan or overdraft facility is something that you do not have to apply for every time you need funds. If you have this facility in your bank account, you can readily withdraw additional funds without informing the bank. However, you are required to deposit the excess amount along with interest within a specific time limit for the bank to keep providing this facility to you.

• Eligibility

Personal loans require the borrower to submit various documents such as income proof for the last six months, ITR for the previous three months, and KYC details. Despite providing all these documents, you still cannot ensure that the bank/NBFC will approve your loan application.

In contrast, a personal overdraft loan doesn’t require you to prove your eligibility each time you utilize the overdraft feature. However, the bank can terminate the overdraft facility of your account at any time if you delay the repayment.

• Repayment method

Personal loans are repaid in the form of equated monthly installments (EMIs) within a stipulated time frame. The personal loan EMI amount varies with the total loan disbursed and the interest rate applied by your lending institution.

Meanwhile, a personal overdraft loan can be repaid simply by depositing the entire amount plus interest in the borrower’s bank account. You can also transfer the whole amount (overdraft + interest) directly to the bank through a cheque or wire transfer. The bank automatically deducts the amount, making you eligible once again for another overdraft as and when needed.

• Prepayment

Both a personal loan and a personal overdraft loan can be prepaid if the borrower manages to arrange for funds before the tenor of the loan. However, lending institutions charge a prepayment fee of around Up to 4.72% (inclusive of applicable taxes) for prepaying a personal loan. In comparison, if you prepay a personal overdraft loan, you will not be charged any penalty or extra fee by the bank.

Summary: A personal loan and a personal overdraft loan are different lending instruments that make your financial life more manageable. While personal loans are apt for salaried individuals with a fixed monthly income, a personal overdraft loan is an overdraft facility that your bank extends to your account. This means you can overdraw from your account up to a certain limit even if your bank account does not have funds to cover the entire withdrawn amount. This comprehensive guide will answer all the doubts you may have about Overdraft loans vs Personal loans.