By Paskola Value: The difference between an overdraft
facility and a personal loan.
In case of
an overdraft, interest is not charged until you actually withdraw the amount.
Also, interest is charged only on the amount being used.
Borrowing a
loan is one of the most ways of business financing. There are various reasons
people can borrow loans; it can be to finance their businesses, school fees
loan among others. In a situation where you have insufficient funds, the only
solution for you is to borrow a loan. You can borrow a loan to either meet
short-term financial needs or long-term. You can either borrow a loan from a
bank, friends, family, and relatives. Take a look at various benefits of
borrowing a loan.
What is it?
The
overdraft, when availed, is a short-term loan. The facility allows account
holders to make withdrawals from an existing savings bank account even after
the balance reaches zero. In other words, if you have an approved overdraft
limit of ₹ 50,000 and have ₹ 50 lakh in your account at present, you can
withdraw up to ₹ 1.5 lakh.
Some banks
offer overdraft facility to salary account customers, based on the employer as
well as individual credit profile, or to customers with a sound credit profile.
Banks also provide overdraft on a collateral like a fixed deposit. In case of
an FD-backed overdraft, the approved limit is lower than the FD value and the
interest rate is higher than the FD rate. It is also available against home
loans.
The interest
rate applicable could be comparable or higher than personal loan rates for an
individual. Repayment is usually allowed over a fixed period of time based on
eligibility, and can be in the form of EMIs. You can also repay the entire
amount, without any pre-closure charges.
How is it different?
When you
apply for a personal loan and it is approved and disbursed by the bank, the
amount is credited to your account. Once the amount is disbursed, the levy of
interest starts immediately on the entire amount. For instance, if you take a ₹
50,000 personal loan, irrespective of whether you use the amount or not, you
will have to pay interest on the entire sum, until you repay the loan.
In case of
an overdraft, you don’t have to pay interest until you actually withdraw the amount.
Moreover, interest is charged only on the amount being used, and not on the
entire limit, like in a credit card. For instance, if you have an overdraft
limit of ₹ 50,000, but you withdraw only ₹ 25,000 using the overdraft facility,
the interest will be applicable only on ₹ 25,000 and not on the entire sum of ₹
50,000. But unlike a credit card, where you have the grace period, when
interest is not applicable on the amount borrowed, in an overdraft, interest is
applicable from the day of borrowing itself.
However, the
amount allowed to be withdrawn through an overdraft could be lower for a person
eligible for a higher personal loan.
An overdraft
can be used for short-term requirements. If you are using an overdraft but feel
you would need more funds or more time to repay, it is a better idea to convert
the overdraft into a personal loan.
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This Article write : Pushpendra Paskola Value
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