Overdraft (OD) vs Personal Loan (PL): Interest Rates, Benefits, Features, Differences Explained

A personal loan (PL) or overdraft (OD), people often find it difficult to understand these two credit products, the advantages, benefits, loan amount, interest rates, fund disbursal time, processing fees, limitations, repayment tenures, etc. 

What is an Overdraft (OD)?

An overdraft is nothing but a credit line activated by a lender through which you can withdraw any amount up to the permissible limit and repay without the monthly boundations. The repayment of the overdraft amount can be done at the borrower’s discretion as overdrafts don’t have the obligation of EMIs. 

What is a Personal Loan?

A personal loan is a fixed amount that you can borrow from a bank or NBFC at a fixed rate of interest for a set number of months. The repayment of a personal loan starts from the following month through EMIs on a pre-decided repayment tenure. Borrowers have the option of prepayment or partial payment of personal loans. 

Overdraft vs Personal Loan: 7 Main Differences

• Amount: The availability of funds in an overdraft is limited as compared to a personal loan. Overdrafts are principally designed to fund a short-term monetary shortfall or inconsistencies in income. Therefore, it is best to apply for an overdraft if you’re anticipating fund inflows in the near future and presently, you’re not in a position to service EMIs. Personal loans are designed for long-term capital-intensive requirements when you need the funds in a lump sum. People who are in a position to begin the repayment immediately after a month of receiving the funds choose the route of personal loans. A predetermined amount is transferred to the bank account and the lender initiates an auto-debit to receive the EMIs. 
• Fund Disbursal: The fund disbursal timelines for both personal loans and overdrafts have reduced significantly with the increasing usage of digital KYC and quick access to credit scores. In the case of a personal loan, a lender may take 2 to 3 days to transfer the funds after successful verification of personal details and the documents submitted alongside. For an overdraft, banks and NBFCs may take a little longer to sanction a credit line. There is no actual disbursal into the bank account as a credit line gets activated. The borrower can withdraw any amount up to the maximum limit and repay it within the maximum permissible time. 
• Interest Rates: The personal loan interest rates are principally lower as compared to overdraft interest rates. In the case of a personal loan, a set EMI structure is communicated to the borrower on or before the disbursal of the loan amount. Some lenders charge a flat interest rate, while some levy reducing balance interest rates. The EMIs include a dynamic component from the principal outstanding and the interest amount. Whereas, the interest rate calculations for an overdraft amount happen daily. For example, a daily interest rate of 0.42% will be charged on the withdrawn amount from the overdraft account if the annual interest is 15%. 
• Repayment Frequency: The repayment of personal loans is done to EMIs, the lender usually sets an auto-debit on the savings account of the customer’s choice for payment on the scheduled due date. You can choose to prepay or part-pay the personal loan outstanding by paying a small fee. The repayment of an overdraft is not bound by EMIs as a borrower can repay any amount well within the prescribed repayment tenure of 3 years, 5 years, etc. If you’ve withdrawn Rs 2.5 lakh from the overdraft account, you can choose to repay any amount, at any time. The more you repay, the lesser the interest charges. 
• Tenure: The repayment tenures of personal loans and overdrafts can stretch up to a maximum of 8 years. 
• Processing Fee: The processing fee on personal loans is relatively lower as compared to that levied on overdrafts. 
• Penalties on Missing Repayment: The penal interest rate on overdrafts and personal loans ranges between 1-3% p.a. The quantum of penalties could be higher on non-repayment of overdraft balance beyond the allotted repayment tenure. 

Eligibility for Overdraft and Personal Loan

Any individual with a CIBIL score over and above 700 can easily qualify for a personal loan, as well as an overdraft. The applicable interest rate, the flexibility of repayment, the quantum of loan amount and processing fee remain subject to fulfillment of other parameters including the credit mix, repayment history, credit utilisation ratio, debt to income ratio, stability of income, nature of employment, etc. 

How to decide between Overdraft and Personal Loan?

The requirement of funds and the ability to repay can be the guiding factors behind choosing an overdraft or a personal loan. You should go for a personal loan if you need funds in a lump sum and are in a position to start the repayment from the following month. While an overdraft becomes a feasible option if you’re unsure of starting the repayment immediately after borrowing, while the fund requirement is dynamic.