In the world of borrowing money, the two most common options are personal loans and overdrafts. But what is the difference between these two choices? And, which one is better for you? A personal loan is a lump sum loan amount given to you by the bank, which you repay in installments over a period of time. On the other hand, an overdraft is a credit line provided by the bank where you have the flexibility to withdraw the amount and repay it as per your convenience.
If you choose a personal loan, you will know the amount of money you are getting in advance, the interest charged will be on the entire principal amount, and there is a fixed repayment schedule for EMI. Conversely, if you pick an overdraft, you will get a credit limit from which you can withdraw money as per your requirements, and the interest charged is only on the amount utilized and for the days utilized with no penalty on prepayment.
The choice between a personal loan and an overdraft depends on your situation. If you know the exact amount you need and the repayment tenure, a personal loan is suitable for you. However, if you are unsure about the amount of money you need, then an overdraft would be a better option. Similarly, salaried individuals with a fixed monthly income can opt for a personal loan, while self-employed individuals with uneven monthly cash inflows can opt for an overdraft.
Additionally, if you are an impulsive spender, it would be wiser to go for a personal loan, as the disbursed amount will restrict your spending. But if you are a mindful spender, you can avoid high-cost debt with the judicious use of an overdraft. In essence, your choice between a personal loan and an overdraft should depend on factors such as your need for funds, monthly cash inflows, repayment capacity, and spending habits.
To summarize, both personal loans and overdrafts have their pros and cons. Understanding the differences and evaluating your financial situation can help you make an informed decision about which credit option is better suited for your needs.
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He has shared his expert insights on personal loans and overdrafts to help borrowers make well-informed financial decisions.
