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Are you looking for a loan to make some investment or for some other personal work? Well, you will come across two types of products- personal loans and overdraft facilities. It is important that before you choose one particular option, understand the difference between these two products and then decide which one suits your investment more. 

What is a personal loan?

It is a credit product in which financial institutions lend a certain amount of money to an individual or an entity for a particular period of time for the latter to meet their expenses. The loan amount is required to be repaid within a certain time period on which a rate of interest is levied. For a personal loan in India, no collateral is required from the applicant’s side. 

What is an overdraft facility?

Unlike a personal loan, an overdraft facility is just an agreement between the lender and the applicant. The applicant is allowed to withdraw money more than what is available in their bank account. The credit line is based on the balance in the applicant’s bank account. 

What are the differences between Personal Loan and Overdraft Facility?

While both the facilities are very common these are some of the common differences between personal loans and overdraft facilities. 

  • Credit Availability: Personal loan required documents while applying and once it is approved the applicant is required to repay the amount in a particular time period. In case one wants a personal loan again, the process has to start from scratch again. This however is not the case with the overdraft facility. Once you have availed of the overdraft facility the amount available can be withdrawn at any time. 
  • Interest rate: Once a personal loan has been sanctioned, a pre-determined interest rate is applied, which may vary based on your credit score, whether you use the amount or not. However, with an overdraft facility, if you do not withdraw any amount from your bank account, then no interest is charged. 

The rate of interest charged on an overdraft facility is higher as compared to a personal loan.

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  • Credit limit Modification: When you apply for a personal loan, a loan amount is agreed upon with the lender. Once sanctioned the credit amount. However, if you are availing of the overdraft facility, there is no limit to the credit amount. You can withdraw any amount of money based on your need
  • Tenure: For the personal loan, the repayment tenure can go up to 5-7 years depending on the time period and various other factors. However, for an overdraft facility, the interest rate is higher, thus the tenure is lower.
  • Mode of repayment: For a personal loan, the mode of repayment is through EMI or the required format stated by the lender. However, in the case of an overdraft facility, the repayment is completely at the discretion of the applicant.
  • Prepayment charges: In case of a personal loan, if you wish to repay the loan before the repayment period begins, then the bank may levy a prepayment charge. However, there is no extra prepayment charges levied if you avail an overdraft facility.

Conclusion

A variable borrowing facility with a financial institution is an Overdraft facility, and a fixed amount of borrowing over a set term with regular repayments is a personal loan. While both products have their unique features and each individual has its pros and cons, they are individually suitable in their own manner. Based on your expenses and your financial dreams that you are looking to fulfill through this credit you can decide whether you must go for a personal loan or an overdraft facility.

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Rahul Kumar

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