Personal loan vs overdraft: Know key differences

Banks and non-banking financial companies have been offering a wide range of credit instruments with the rapidly evolving digital lending industry in India. You can easily avail a personal loan or credit card with a few clicks.

Among the credit facilities offered by banks and NBFCs to meet the diverse needs of customers, personal loans and overdrafts have emerged as the most common financial instruments apart from credit cards. If you are running short of cash a personal loan or an overdraft facility could be more helpful. However, both work differently though they meet the same purpose of offering additional funding to the borrower.

Overdraft or personal loan?

It could be confusing to choose between a personal loan and an overdraft facility with the wide range of credit facilities available across banks and NBFCs. Picking the right borrowing instrument depends on your financial needs, repayment ability and the interest rates, or charges levied by the lender.

The approval processes, eligibility criteria and tenure could differ from bank to bank for both the credit options. Let’s take a look at the key details about personal loans and overdraft facilities, which could help pick the right lending option.

If you are looking forward to borrowing an amount, Moneycontrol offers access to personal loans up to Rs 50 Lakhs in partnership with 8 lenders. You can avail the loans in a completely digital process at interest rates starting at a nominal 10.5% per annum.

What is an overdraft?

An overdraft is a credit facility linked to your bank account. It allows you to withdraw more money than you have, up to a set limit.

You only pay interest on the amount used, and repayments are flexible, but exceeding the limit may lead to extra fees. It’s useful for emergencies or temporary cash shortages but can become costly if not repaid quickly due to high interest rates.

Example - If you have ₹1,000 in your account but need ₹2,000, an overdraft allows you to withdraw the extra ₹1,000. You can repay it later with the interest charges.

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How overdrafts work

• Your bank sets a limit on how much you can withdraw from the overdraft facility.


• You pay interest only on the amount you use, not the full overdraft limit.


• Repayments are flexible—you can clear the overdraft at any time.


• Banks may charge fees if you exceed your limit.


• Most banks link the overdraft facility to your savings account and the limit may be based on the monthly average transaction.

Advantages of an overdraft

• Quick access to cash when needed


• No fixed repayment schedule, offering flexibility


• Interest applies only to what you borrow, not the full limit


• Good for short-term emergencies like unexpected spending

Limitations of overdraft

• Higher interest rates compared to personal loans.


• Fees may apply if you go beyond your limit.


• Not suitable for large expenses, as limits are usually low.


• Can become a habit, leading to long-term debt.

What Is A Personal Loan?

A personal loan is a fixed amount of money borrowed from a bank or lender that you repay in monthly instalments with interest. The loan is given as a lump sum, and you must pay it back over a set period, usually ranging from a few months to several years. It has a lower interest rate than an overdraft but comes with fixed repayments. Personal loans are ideal for big expenses like home renovations, weddings, or debt consolidation.

How personal loans work

• You apply for a fixed amount from a lender


• The bank approves and disburses the money in a lump sum


• You repay in fixed instalments over the predefined period, which may extend from a few months to a maximum of 5 years.


• Interest is charged on the full amount for the entire tenure, not just what you use.

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Advantages of personal loan

• Lower interest rates compared to overdrafts


• Fixed repayments, making budgeting easier


• Higher borrowing limits, useful for big expenses


• Better for long-term financial needs like home renovation or debt consolidation

Limitations of personal loan

• It’s less flexible as you must repay the entire amount in equated monthly instalments (EMIs)


• Full interest applies on the borrowed amount for the entire tenure


• Approval takes time, unlike an overdraft


• Early repayment charges or foreclosure charges could be levied by a few lenders

Key Differences Between Overdraft And Personal Loan

When should you choose an overdraft?

An overdraft could be useful in following circumstances:

• You need a small amount for a short period


• You want flexibility in repayments


• You’re unsure exactly how much money you need


• You can repay quickly to avoid high interest

For example, If you have an unexpected medical bill or a temporary cash crunch before your salary arrives, an overdraft could be helpful.

When to choose a personal loan

A personal loan is better if:

• You need a larger amount for a big expense


• Borrowing at a lower interest rate


• You prefer structured repayments


• You’re making a planned purchase or investment
  For instance, if you are renovating your home, paying for a wedding, or consolidating debt, a personal loan is a better choice.

Conclusion

Both the credit facilities- personal loans and overdrafts— meet the same purpose of providing access to additional funds. However, choosing the right credit facility should depend on your financial needs. It’s also important to carefully evaluate the interest rates, fees and charges collected by the banks on a personal loan and overdraft, before borrowing.

You can explore multiple personal loan offers through the Moneycontrol app and website for amounts up to Rs 50 Lakhs. The loans can be availed in a 100% paperless process. The interest rates start at as low as 10.5% per annum.