Which One Is Better Between Regular EMI Option And Overdraft Facility? - Loan Trivia


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Sunday 28 March 2021

Which One Is Better Between Regular EMI Option And Overdraft Facility?


Overdraft is a short-term loan that account holders may avail to withdraw from an existing current account even if there is no balance. There is an upper limit specified till which money may be withdrawn in such a manner. Consider this; if the permitted overdraft limit is Rs.50,000 and there is Rs.70,000 in the savings account at present, the maximum withdrawal will be up to Rs.1,20,000. 

Differences between overdraft facility and personal loan

If you are thinking "what is overdraft loan?" and how it is different from a personal loan, the answer pertains to how the fund is made available to an account holder or borrower. 

In case of a personal loan, it is approved and disbursed by a lender to the borrower's account. On the contrary, overdraft facilities allow the account holder to withdraw until the permissible limit is reached, without any further approval.

However, to determine which one makes for the best option, there are certain parameters which must be taken into consideration –

  • Accessing funds

To avail a personal loan, an applicant has to complete the documentation process and have a healthy credit score. However, it can be a bit different for Flexi personal loan, where a pre-approved loan amount is provided based on an applicant's eligibility and credit score. Money can be withdrawn from this limit as many times needed without applying for another personal loan. 

NBFCs such as Bajaj Finserv extend pre-approved offers to existing customers to simplify the application process. Such offers are provided on personal loans, business loans, etc. You can check your pre-approved offer by entering your name and contact number. 

However, in an overdraft account, money can be withdrawn within a few hours or by the end of one business day. There is no need to set up an overdraft account every time money has to be withdrawn. This also applies for personal overdraft loan accounts as well.

  • Interest 

Interest rates of conventional credits, such as a personal loan interest rate, becomes applicable from the time of loan disbursal, irrespective of whether the money has been utilised or not. If a borrower prepays the loan amount, apart from the principal and interest amount, pre-payment fee also has to be paid. It is one of the essential things to know before signing a personal loan agreement

The aspect of payment of interest for overdraft is different. The account holder will pay interest only on the amount that is utilised from the overdraft limit. No additional charge is levied for prepayment of the amount. 

  • Impact on credit score 

Multiple personal loan applications (within a short period) is likely to affect one’s CIBIL score negatively. If there is any delay in monthly payments, it would leave an even worse impact on credit score. On the contrary, withdrawing money from an overdraft account means there is only one loan that has to be regularly serviced. It reflects favourably on the CIBIL score. 

At the outset, overdraft facility may be preferable over standard EMI option. If an individual requires multiple loans, it would be a better option to withdraw money from an overdraft account. However, if a single loan is needed with a bigger loan amount, a personal loan would be appropriate and an effective way to manage your debt.

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