A loan is what happens when someone takes out a specified amount from a financial institution and pays interest on the amount they borrow. There are two components to the monthly installments: interest and principal. The residual debt, or remaining loan balance, is steadily decreased by the repayment.
A loan is a loan agreement according to law. The borrower guarantees that he will pay back the loan by the prearranged deadline. This sum, which includes interest and other expenses, is paid by the borrower. However, why do you require a loan of money?
Why Should One Take Out a Loan?
Particularly unexpected costs are frequently covered by credit from banks or NBFCs. It could be specific costs, renovations you’re doing to your home, or a tragic medical situation. With a personal loan or overdraft, you may quickly get your finances back up thanks to the easy, hassle-free loan processing.
What is Known as an Overdraft Facility?
A credit facility known as an overdraft enables you to debit your checking account in excess of your credit limit. Generally, using this facility is free of charge.
The bank will use your regular income proof—such as your salary, the annual turnover of your company, or the activity of your accounts—to determine how much overdraft credit they will grant you.
Many financial institutions allow for an overdraft, usually referred to as a bank overdraft or OD, on current and savings accounts. You can take out more money from your account than what is now accessible because of this feature.
For the purpose of helping you understand this idea more clearly, look at the following example:
Let’s say you currently have ₹10,000 in your account. You use your debit card to pay Rs. 12,000 for a TV. As you are short by about ₹2,000, you will normally be unable to complete this purchase.
Even with the shortage, you may still buy a TV for ₹12,000 provided you qualify for an overdraft facility. This amenity is not free, though.
A certain interest rate will be applied to any additional funds you spend or withdraw because, in basic terms, an overdraft is a bank loan.
Therefore, you will be responsible for paying interest on the extra ₹2,000 you spent in the case above.
A Personal Loan: What Is It?
For funding personal crises, a personal loan, also known as a consumer loan, is thought to be the better option. The following essential elements define a traditional personal loan:
- For the duration of the term, a fixed debit interest rate
- Terms vary based on the lender, from 12 to 120 months.
If a personal loan is financed by a bank, the wage assignment ensures the loan’s security. Your salary account needs to be open with the bank.
While the interest rate on an installment loan is typically much lower than that of an overdraft facility, the exact amount is typically determined by the borrower’s credibility.
If a personal loan is financed by a bank, the wage assignment ensures the loan’s security. Your salary account needs to be open with the bank.
While the interest rate on an installment loan is typically much lower than that of an overdraft facility, the exact amount is typically determined by the borrower’s credibility.
An authorized overdraft facility typically carries an effective yearly interest rate that is much greater than that of a personal loan from the bank. Banks charge little to no interest for using the overdraft facility under certain situations. It is crucial to compare these two loan kinds since doing so will prevent you from incurring expensive, unexpected expenses.
Personal Loan Highlights 2024
| Loan Provider | R.O.I | Processing Fees | Loan Amount | Cibil Score |
| Paysense Personal Loan | 18% – 22% (Reducing Per Annum) | 2% – 5% | 50.00 k – 10.00 Lacs | 700 |
| Werize Personal Loan | 15% – 22% (Flat Per Annum) | 3% – 5% | 30.00 k – 5.00 Lacs | 650 |
| Money View Personal Loan | 17% – 36% (Reducing Per Annum) | 1% – 5% | 5.00 k – 5.00 Lacs | 650 |
| IDFC Bank Personal Loan | 10.49% – 22% (Reducing Per Annum) | 1% – 4% | 1.00 Lacs – 40.00 Lacs | 700 |
| Incred Personal Loan | 16% – 33% (Reducing Per Annum) | 1% – 5% | 50.00 k – 10.00 Lacs | 650 |
| Aditya Birla Personal Loan | 12% – 28% (Reducing Per Annum) | 1% – 4% | 1.00 Lacs – 50.00 Lacs | 650 |
| Finnable Personal Loan | 16.95% – 30% (Reducing Per Annum) | 1% – 5% | 50.00 k – 10.00 Lacs | 700 |
| Hero Fincorp Personal Loan | 9.5% – 16% (Flat Per Annum) | 1% – 5% | 50.00 k – 10.00 Lacs | 700 |
| Muthoot Finance Personal Loan | 14% – 22% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 7.50 Lacs | 685 |
| Upward Fintech Personal Loan | 18% – 32% (Reducing Per Annum) | 2% – 5% | 25.00 k – 5.00 Lacs | 650 |
| Cashe Personal Loan | 1.5% – 3% (Fixed Monthly) | 1.5% – 2% | 10.00 k – 4.00 Lacs | 550 |
| Finzy Personal Loan | 10.99% – 18.99% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 10.00 Lacs | N/A |
| Fibe Personal Loan | 15% – 30% (Reducing Per Annum) | 1% – 2% | 8.00 k – 2.00 Lacs | 550 |
| Faircent Personal Loan | 25% – 30% (Reducing Per Annum) | 7% – 9% | 50.00 k – 10.00 Lacs | 700 |
| Stashfin Personal Loan | 2.45% – 4% (Fixed Monthly) | 2% – 2% | 5.00 k – 5.00 Lacs | 725 |
| Tata Capital Personal Loan | 10.5% – 14.25% (Reducing Per Annum) | 0.75% – 2% | 75.00 k – 25.00 Lacs | 720 |
| Standard Chartered Bank Loan | 11.49% – 20% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 1.00 cr | 740 |
| Bajaj Finserve Personal Loan | 13.5% – 15% (Reducing Per Annum) | 0.5% – 1.5% | 1.00 Lacs – 35.00 Lacs | N/A |
| Axis Bank Personal Loan | 11.15% – 16.25% (Reducing Per Annum) | 1% – 4% | 1.00 Lacs – 40.00 Lacs | 690 |
| ICICI Bank Personal Loan | 10.5% – 15% (Reducing Per Annum) | 0.5% – 1.5% | 1.00 Lacs – 1.00 cr | 700 |
| Fullerton Personal Loan | 14% – 32% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 25.00 Lacs | 705 |
| HDFC Bank Personal Loan | 10.25% – 16% (Reducing Per Annum) | 0.5% – 1.5% | 1.00 Lacs – 1.00 cr | 700 |
| Shubh Life Personal Loan | 28% – 44% (Reducing Per Annum) | 1% – 3% | 5.00 k – 2.00 Lacs | 650 |
| Loan Tap Personal Loan | 11% – 24% (Reducing Per Annum) | 1% – 2% | 50.00 k – 7.00 Lacs | N/A |
| KreditBee Personal Loan | 1.5% – 3% (Fixed Monthly) | 5% – 6% | 1.00 k – 3.00 Lacs | 550 |
| FlexSalary Personal Loan | 1.5% – 3% (Fixed Monthly) | 300% – 750% | 4.00 k – 2.00 Lacs | 550 |
| Mpokket Instant Loan | 2% – 4% (Fixed Monthly) | 50% – 200% | 500 – 30.00 k | 550 |
| MoneyWide Personal Loan | 17% – 24% (Reducing Per Annum) | 1% – 3% | 10.00 k – 3.00 Lacs | 650 |
| Insta Money Personal Loan | 13% – 36% (Reducing Per Annum) | 1% – 4% | 5.00 k – 25.00 k | 650 |
| Kotak Bank Personal Loan | 10.75% – 22% (Reducing Per Annum) | 0.75% – 2.5% | 1.00 Lacs – 50.00 Lacs | N/A |
| Cholamandalam Personal Loan | 14% – 22% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 35.00 Lacs | 675 |
| SBM Personal Loan | 14% – 20% (Reducing Per Annum) | 1% – 4% | 50.00 k – 25.00 Lacs | 700 |
| Axis Finance Personal Loan | 14% – 16% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 50.00 Lacs | 650 |
| Shri Ram Finance Personal Loan | 13% – 16% (Reducing Per Annum) | 1% – 3% | 1.00 Lacs – 25.00 Lacs | 680 |
| One Tap Loan Personal Loan | 24% – 36% (Reducing Per Annum) | 2% – 5% | 50.00 k – 5.00 Lacs | 650 |
| Credset Personal Loan | 18% – 30% (Reducing Per Annum) | 3% – 5% | 50.00 k – 5.00 Lacs | N/A |
5 Significant Differences Between Personal Loans and Overdrafts
- Personal Loan Versus an Overdraft Facility
An overdraft facility is frequently more expensive than a personal loan or an installment loan. When you have a personal loan, the bank is aware of your exact loan payments and when a repayment schedule needs the loan to be paid off in full. By doing this, you raise and maintain your CIBIL credit score.
It is not the case with the overdraft facility. There’s no assurance that you’ll ever pay it back. Furthermore, if you are unable to restrict your spending, the amount you must repay grows every day. No installment agreement or similar documentation exists.
That is why, in the event that a personal loan has a suitable repayment plan, the bank bears less of the risk of non-payment. The bank gives you low interest rates in this situation.
- Term
A personal loan often has a lengthy repayment period, ranging from two to five years.
When a consumer has an overdraft facility, they can take out more money than they have in their accounts. There is no deadline for when you have to pay back the money.
- Interest Rate
The RBI sets the predetermined interest rate for personal loans. Personal loans typically have lower interest rates than overdraft credits.
Overdrafts have no set payback period; hence, the interest rate is high to encourage prompt repayment in order to prevent consumers from incurring large monthly interest payments.
- Processing
Compared to overdrafts, personal loans require additional documentation and authentication. Before authorizing the loan amount, banks check a number of things, including your income proof and KYC.
After reviewing the credit activity on an account, banks grant overdraft benefits to their prospective and current clients. Verification of the documents has a less important function here.
- Foreclosure
There is a fee associated with foreclosing on a personal loan if you choose to repay the loan earlier than the agreed-upon term. Bank-to-bank variations exist in this fee. If you wish to foreclose them due to an overdraft, there is no such fee.
For example, you can use a personal loan to remove yourself from your overdraft facility. You have the option to completely clear your account and then make monthly payments to settle the rescheduled loan installments. Rescheduling the loan guarantees a better and more transparent financial condition by balancing the overdraft facility with a regular personal loan. On the other hand, you pay less interest when you terminate the overdraft facility.
Which is Better, a Personal Loan or an Overdraft?
You can easily access the necessary loan amount with the overdraft facility, and there are no questions regarding your present financial or personal circumstances. However, the drawbacks of an overdraft, such as excessive interest rates, are significant.
Security in Financial Planning
For the duration of the loan payback period, you can agree on a set interest rate for a personal loan. You are not allowed to have this cushion using the overdraft facility. There is always a chance that the bank will raise the interest rate on your overdraft, which will add unexpected costs to your repayment plan. This characteristic is accompanied by a high risk of debt.
Various Fields of Applicability
Purchases of consumer gadgets, cars, or furnishings are not appropriate uses for the overdraft facility. It is not meant to be used for large purchases, but rather to offset account balance changes. There is always a chance that the overdraft account will not be repaid if your buying expenses spiral out of hand.
In this case, a personal loan is a preferable option. When taking out a loan, you can frequently take advantage of better terms and save even more money by indicating the intended use. The explanation is because banks typically view the planned usage as collateral.
Solutions for Handling Increasing Interest Rates
Customers sometimes face double-digit interest rates while repaying loans, with overdraft charges reaching 8% annually, based on their credibility.
The only thing that can assist a client in coping with the high interest rates is their initiative and financial discipline. As an illustration, you are required to consistently verify if the overdraft facility is primarily utilized for brief financial activities and not for medium- or long-term account transfers.
When it comes to personal loans, you should always have enough money in your savings account two days before the loan’s installments are due in order to avoid missing any payments and incurring any penalties.
You can always choose to foreclose on a personal loan, which means you can pay back the loan early and save money on interest. You will save some money every time you have additional money if you pay back your loan.
Bottom Line
You have the legal obligation to pay the money back that you took out from banks, along with interest. However, you won’t ever run out of money when you need money because of the lending feature. Overdrafts and personal loans both have benefits and drawbacks.
When large sums of money are needed for expenses like paying for a wedding, covering your child’s college tuition, and other similar scenarios, a personal loan is a better option because it can be repaid in manageable, small monthly installments.
However, if you intend to use an overdraft facility to cover more transient costs and require emergency funds that can be paid back quickly, then it can make more sense.
While keeping your credit score unaffected, compare the interest rates on the two options and make a smart choice. The best solution is always a personal loan, and Refer Loan is the platform to choose if you want a simple application procedure with less paperwork, online tracking, and personal support. To better assist you, Refer Loan is available at all times.