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Overdraft Facility - The best kind of personal loan

· Overdraft Loans

During the tough times, people are considering credit facilities to overcome their financial short term liquidity shortage. Personal loan and an overdraft facility are two of the options available in the market.

Personal loan and overdraft, both the credit facilities are offered by banks and financial services companies with different terms and conditions. Out of the two, overdraft facilities are better to finance short-term cash requirements. For the uninitiated, overdraft is a credit facility linked to a bank account. With this facility, a user can use or withdraw money from a bank account even if there is no money left in the account.

In layman terms, this product allows customers to overdraw on their bank account. Once banks assign overdraft facility to an individual then the amount is readily available to you and you can withdraw the amount easily whereas a lot of paperwork and preliminary verifications are required for taking personal loans.

Credit limit of an overdraft facility:

Under overdraft facility, different credit limits are assigned to different borrowers, therefore a customer can withdraw any required amount within the assigned limit while in personal loans the amount which is to be sanctioned is mutually agreed between bank and borrower.

Interest rate offered by an overdraft facility:

The interest rates levied on overdraft is higher compared to personal loans. While on personal loans, pre-decided interest rates are applied once the loan amount is sanctioned, in case of overdraft, a credit limit is given and if an individual doesn’t withdraw from the overdraft limit then no interest would be charged.

Credit Card, personal loan, fixed deposits and bank overdraft are some of the most common types of overdraft facilities offered by banks, lenders. All these overdraft facilities carry certain charges, interest on the amount withdrawn/availed, credit limits, etc.

How does an Overdraft facility work?

An overdraft facility works a lot like a credit card wherein there is an overdraft limit set and the user can withdraw up to the limit over and above the balance in their account. However, unlike a credit card, there is no interest-free period on overdrafts which means that interest and fees are charged on overdraft from the day customers use the limit.

How to repay in an overdraft facility?

An overdraft can be repaid whenever the borrower has the money. Unlike a loan, one is not required to repay the amount by a certain date or in certain installments. They can repay whatever amount they want. However, if the lender demands a repayment, then they will have to fulfill that demand. The amount overdrawn must be repaid as soon as possible to avoid interest charges, which can be very high.

Thus, an overdraft facility is a personal loan product that comes most handy in times of uncertain and recurring expenses. It sums up to a much cheaper and more affordable credit option as compared to credit cards.