Overdraft vs Personal Loan: Check when OD could be a better option
Overdraft services and personal loans are popular short-term credit facilities best suited for emergency needs of funds. However, Overdraft facility offers more flexibility and comes with lower interest rate compared to personal loan.
Overdraft (OD) and personal loan facilities are suitable short-term credit services to meet your financial needs. Though it has become convenient these days to avail a personal loan or overdraft facility, both come with their own set of advantages and disadvantages. Both the credit facilities can be availed in a short period of time, but you can use overdraft almost immediately.
Compared to personal loans, you will get a small amount under overdraft. While both these options could be useful in a financial crisis, you should consider multiple factors like interest rate and repayment conditions, among others, before availing one.
Situations when Overdraft could be better than a personal loan
Uncertain cash needs: Overdraft facilities are the best when it comes to uncertain needs of money. A personal loan isn't the best option here as it provides a lump sum at a time and availing it multiple times would negatively affect your credit score. Moreover, overdraft facilities can be availed almost immediately while a personal loan application is approved after a complete process.
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Savings on interest: While personal loan interest is charged on the entire amount sanctioned, overdraft facilities generally charge an interest on the amount actually utilised. This helps you save a lot on interest payments as you need not pay interest on the entire overdraft limit sanctioned. On the other hand, you might pay interest on the entire personal loan amount.
Business needs: Overdrafts are commonly used by businesses to manage working capital and emergency needs of funds for smoother operations. These facilities offer easy access to funds to manage business operations as a personal loan wouldn't be suitable for changing business needs.
Preserving savings: When in an emergency need of funds, you can preserve your savings or investments by not cashing in on them. Overdraft services could be used in such cases to manage emergency needs of funds while keeping your savings safe. Over time, these savings and investments would make up for the interest paid on overdraft amount.
Short-term cash flow gaps: Businesses might often face short-term cash flow gaps and overdraft funds could be a saviour in this case. You might not need a personal loan if the fund requirements would be met via overdraft services. For instance, if you're waiting for a pending payment but need funds urgently, an overdraft facility can help in running the business until you receive the payments.