Personal loans and overdraft accounts are popular unsecured credit products in today’s market. While both of them come with almost similar rates of interest, they’re different in aspects pertaining to repayment, the maximum amount that can be borrowed, and flexibility. The question on which of these products is a better option is often posed.
These days, personal loans are offered by multiple lenders, while overdrafts are mostly offered by top banks. As for personal loans, new-age Fintech lenders have come to dominate the market, enabling individuals to access quick loans that are delivered within the span of 24-48 hours. In this article, we observe key features of both personal loans and overdraft accounts and determine which of these products is the better fit as far as your requirements are concerned.
The primary attribute of personal loans is that the repayment remains fixed through the loan tenure. Interest rates are fixed too and aren’t subject to change in the manner that home loan interest rates are (rates on home loans under the variable rate category are subject to change based on market parameters).
Most lenders offer personal loans with tenures that range between 6 months and 60 months, and customers are given the choice to choose a tenure based on their repayment convenience. Longer tenures usually have lower repayments unlike short tenures, but attract more interest over the years that the loan remains active.
As such, customers who want to avail a fairly large loan amount can opt for a long tenure, say maybe 5 years, and pre-close the loan at a nominal fee (lenders allow individuals to pre-close their loan at a certain fee).
An overdraft works more like a line of credit – meaning, you don’t receive a lump-sum amount as you do in the case of a personal loan. You are allowed to use as much as you please against your available limit, which is usually about 8x times your monthly income. Better yet, you only pay interest for the amount you use against your available limit, and the principal can be repaid at your convenience before the end of the term.
This means that if you use a certain amount (x), you’d only have to pay interest on that amount on a monthly basis, and the principal can be cleared at a later time.
Coming to which of these is better to opt for, well, it boils down to the end use and your requirement as it exists currently. If you’re looking at the short-term and also feel you might require money at a later date too, choosing the overdraft over a personal loan makes better sense. But remember, your limit on the overdraft is usually high, and using it up entirely without a stable income can land you in serious debt.
If your requirement is fixed and you only need a fixed amount of money for a particular reason, personal loans make better sense, as they are accompanied by fixed repayment amounts and flexible tenures. With fixed monthly repayment amounts, you can plan your finances better, and accordingly, pre-close your loan to avoid paying continued interest over the course of your loan tenure.