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Difference Between an Overdraft and a Personal Loan
Posted on Friday, January 24th, 2025 | By IndusInd Bank
There are various moments in life when additional financial support becomes necessary. It could be for medical emergencies, house renovations, educational fees, wedding expenses, a spontaneous holiday, or consolidating multiple loans. Among the various credit options available, personal loans and overdrafts are the two most chosen ones. While both offer quick access to the funds you need, they differ in terms of how they work, repayment structures, interest rates, and the type of borrower they best suit.
Let’s learn more about both options.
What Is a Personal Loan?
A personal loan is an unsecured loan offered by banks, meaning it doesn’t require collateral such as a home or car. To determine eligibility and repayment capacity, banks assess the borrower’s creditworthiness by reviewing factors like income, credit score, and financial history. You can utilise an instant personal loan for a variety of purposes, such as:
- Wedding
- Medical emergencies
- House renovations
- Education
- Travel
- Debt consolidation
Here is how it works: Let’s say you apply for the IndusInd Bank Instant Personal Loan to enjoy the best-in-class interest rate and easy repayment terms. Once approved, the loan amount is credited to your bank account, and you repay it in fixed Equated Monthly Instalments (EMIs). After repaying the loan, you can get a No Objection Certificate (NOC), which certifies that the loan has been fully settled.
To manage your repayments effectively, you can even use the personal loan EMI calculator available on the IndusInd Bank website. Enter your loan amount, tenure, and applicable interest rate to calculate your future EMIs and plan your finances accordingly.
What Is an Overdraft (OD) Facility?
An overdraft is a credit facility attached to your bank account. This financial flexibility allows you to withdraw more money from your bank account than you currently have, up to a pre-approved limit. In simple words, the bank gives you a short-term loan when your account balance falls to zero. They are typically more suited for those who require funds intermittently but don’t need a large lump-sum amount.
Overdraft vs Personal Loan | Key Differences to Note
Let’s break down the key differences between personal loans and overdraft facilities.
| Aspect | Personal Loan | Overdraft |
| Structure of borrowing | The entire loan amount is credited in one go, and the borrowing limit is often higher than what you might receive with an overdraft facility | Operates as a revolving credit as you can borrow, repay, and then borrow again within the approved limit without reapplying for each transaction |
| Interest payment | Interest is calculated on the full loan amount, regardless of when or how much is used | Interest is calculated only on the amount utilised and for the duration used |
| Repayment flexibility | Fixed monthly instalments between 1-4 years | Flexible repayment without a fixed schedule |
| Purpose | Ideal for larger, planned expenses such as house renovations, weddings, travelling, or medical emergencies | More appropriate for short-term, unforeseen situations like income shortfalls, unexpected car repairs, or emergency expenses |
| Cost | Lower interest rates since repayment is scheduled through fixed EMIs over 1-4 years | Higher interest rates due to daily calculation and could be more expensive if not managed carefully |
Also Read: How a Personal Loan Helps in Easy Management of Large Local Bills
OD vs Personal Loan | Which One to Choose?
Many wonder, “Is an OD better than a personal loan, or is it the other way around?” The decision between these two options will depend on your financial situation and the purpose of the loan.
Overdrafts allow you to borrow as needed, and interest is charged only on the amount you use. This makes it more appropriate for short-term or unpredictable expenses. However, overdrafts can come with higher interest rates and no fixed repayment plan, which makes them less suited for long-term financial commitments.
If you want a more structured solution with predictable repayments, a personal loan might be the best option. You get a lump sum at a competitive interest rate with fixed EMIs, which makes budgeting easier. The loan can be repaid across a tenure of up to 4 years, which is ideal for larger expenses or planned investments.
Moreover, if you choose the IndusInd Bank Instant Personal Loan, you benefit from a 100% digital application process with no need for physical paperwork or hidden fees to worry about.
To Sum Up
Although both overdrafts and personal loans offer financial support, they differ significantly in their structure, interest calculation, and flexibility. While an overdraft offers flexibility for short-term cash flow requirements, personal loans provide a systematic solution for more significant expenses over time. Both options of borrowing address different financial requirements, based on the size and urgency of the expenses.
To enjoy an affordable and stress-free borrowing experience, trust IndusInd Bank Instant Personal Loans. You can borrow as little as ₹30,000 or as much as ₹5 lakh, based on what suits your needs. Moreover, you benefit from quick disbursal, a competitive interest rate, flexible repayment options, and a transparent cost structure.
Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information.
