Overdraft Facility vs Personal Loan Which is Best ?

Overdraft Facility vs Personal Loan Which is Best ?

Overdraft facility vs Personal Loan

You can withdraw cash without requiring securities. This is most important overdraft facility. Additionally, Which is offers easy credit for businesses. But Personal loan is not like this. Personal loan available for all individuals. You can access credit from any banks and NBFC. But interest rate will be differ. Same time Personal loan is long time tenure. It may be 1 years to 8 Years depends on banks. But Overdraft is Short term.

Overdraft Facility Overview

If you are interested Interested in this OD Facility. Keep reading full article to get all eligibility criteria. Follow their application process and keep softcopy and hard copies of required documents.

The first overdraft facility was established in 1728 by the Royal Bank of Scotland.

An overdraft happens when you take out more money from your bank account than you have in it, leaving you with a negative balance. It’s like a short-term loan from the bank. Additionally, This financial service allows account holders to temporarily borrow funds up to a certain limit, often for a fee or interest.

Overdraft accounts are offered by banks in many countries around the world, with some key differences in features and regulations.

Why opt overdraft account over the personal loan

loan officer

There are several reasons why you might choose an overdraft account over a personal loan. Firstly, flexibility is a key factor: overdrafts offer more flexibility compared to personal loans. With an overdraft, you can withdraw funds as needed up to your approved credit limit and repay the amount on your own schedule. In contrast, personal loans provide a lump sum upfront that must be repaid in fixed monthly installments over a set period.

Additionally, interest savings is another benefit: overdrafts typically charge interest only on the amount you actually withdraw, not the entire credit limit. This can lead to significant interest savings compared to personal loans, where interest accrues on the full loan amount from the time of disbursal.

Moreover, faster access to funds is an advantage: overdrafts provide quicker access to funds compared to personal loans. Once approved, you can start withdrawing from your overdraft account immediately, whereas personal loans may take a few days to process and disburse.

Furthermore, uncertain cash needs can be better managed: overdrafts are well-suited for managing uncertain or fluctuating cash needs, such as in businesses. You can withdraw funds as required without committing to a fixed repayment schedule. Personal loans are less flexible for this purpose.

Finally, preserving savings is crucial: in an emergency, you can use an overdraft to meet funding needs without having to dip into your savings or liquidate investments. This allows you to preserve your long-term financial assets while addressing short-term cash flow gaps.

However, personal loans may be preferable for larger, planned expenses like home renovations or debt consolidation, where a fixed repayment schedule provides more structure. Ultimately, the choice depends on your specific financial situation and requirements.

Eligibility criteria

The key eligibility criteria for an overdraft account in Indian banks are:

  • Citizenship: Firstly, the borrower must be an Indian citizen.
  • Age: Secondly, the applicant should be between 21 and 65 years old to avail the overdraft facility.
  • Existing Bank Account: Additionally, the borrower must have an account with the bank they want to avail the overdraft facility from.
  • Income Criteria: Moreover, banks have their own income criteria to determine eligibility, which varies from one bank to another.
  • CIBIL Score: Furthermore, a good CIBIL score is often required to ensure creditworthiness.
  • Business Entities: Besides individuals, certain business entities like proprietorship firms, public sector companies, public or private limited companies, and partnership firms are also eligible for overdraft facilities.
  • Salaried Individuals: For salaried individuals, they must be in permanent service in the government or a reputed company.
  • Self-Employed Individuals: Likewise, self-employed individuals must be filing Income Tax returns.
  • Self-Employed Professionals: Specifically, professionals such as doctors, engineers, dentists, architects, chartered accountants, cost accountants, company secretaries, and management consultants can apply.
  • Minimum Age: Finally, the minimum age for availing an overdraft facility is 24 years at the time of loan commencement.
  • The final decision on overdraft eligibility lies with the lender based on their internal policies and the applicant’s creditworthiness.

Documents required

The key documents required for an overdraft account in Indian banks are:

  1. KYC Documents:
    • PAN Card
    • Aadhaar Card
    • Voter ID Card
    • Passport
    • Rent Agreement
    • Registered Lease Deed
    • Electricity Bill
  2. Income Proof:
    • ITR with Computation of Income
    • Profit & Loss Account
    • Balance Sheet
  3. Loan Documents:
    • Sanction Letter
    • Up to Date Loan Account Statement
    • Loan Repayment Track
    • 12 Month up to Date Bank Statement Showing Repayment of the Loan
    • Loan Closure Proof if Loan is Closed
  4. Business Documents:
    • VAT
    • Sale Tax
    • GST
    • Latest office Address Proof
    • Company Profile on the Letter Head of the firm
    • Latest Bank Account Statement
    • Memorandum & Article of Association
  5. Other Documents:
    • Loan application form
    • Photo identity proof
    • Address proof
    • Business ownership proof

For customers with pre-approved offers, no additional documents may be required. However, banks may request further documents based on individual cases

What are the Indian banks offer this overdraft account

Indian banks offer this overdraft account

State Bank of India (SBI), which provides overdraft facilities against existing NRE/NRO deposits through internet banking.

HDFC Bank offers overdraft facilities for salary plus, with features like a loan amount of 3 times the salary, a repayment tenure of 12 months, and a processing charge of up to Rs. 1500.

Axis Bank provides overdraft facilities for various account types, including salary accounts and fixed deposits.

ICICI Bank offers overdraft facilities for different accounts and collateral, including fixed deposits and insurance policies.

Punjab National Bank offers overdraft facilities for various accounts and collateral, including fixed deposits and insurance policies.

Tata Capital provides overdraft facilities for various accounts and collateral, including fixed deposits and insurance policies.

These banks offer overdraft facilities with varying features like interest rates, loan amounts, repayment tenures, and processing fees. Additionally some other NBFC also providing best interest for Overdraft account. If you need this account in NBFC, Ask the nearest branch and they tell about their process.

Interest rate

When comparing interest rates between overdrafts and personal loans, several key differences emerge:

  1. Personal Loan Interest Rate: Personal loans offer a fixed rate of interest, usually lower than overdrafts. This rate remains constant throughout the loan term.
  2. Overdraft Interest Rate: Overdrafts generally carry higher interest rates than personal loans. However, interest is levied solely on the withdrawn amount, not the entire credit line, making it more cost-effective for short-term borrowing.
  3. Interest Calculation: Personal loans accrue interest on the entire loan amount, while overdrafts charge interest solely on the overdrawn sum. This provides flexibility and potentially reduces interest costs for short-term borrowing needs.

Which is Best – personal loan or overdraft account

When comparing a personal loan and an overdraft account, your choice depends on various factors. Here are the key differences to consider:

  1. Loan Type: A personal loan is a fixed amount borrowed for a specific period and repaid in monthly installments, while an overdraft allows you to withdraw more than your account balance up to a credit limit.
  2. Interest Calculation: Personal loans have variable interest rates charged on the entire loan amount, while overdrafts have daily interest calculated only on the overdrawn amount.
  3. Speed of Disbursal: Overdraft funds are available within hours, while personal loans may take a few days for approval and disbursal.
  4. Repayments: Personal loans are repaid through EMIs, while overdraft repayments are done through bank deposits in the account.
  5. Loan Tenure and Charges: Personal loans have fixed repayment tenures with additional charges, whereas overdrafts have no fixed tenure or extra fees.

How to apply for Overdraft facilities

Now You know your are eligible or not for this overdraft facility, You can directly apply this account using these 10 steps. Which are most important to stat this OD account on banks.

How to Apply:

To apply for an overdraft account, follow these steps:

  1. Check Your Eligibility: First, make sure you meet the eligibility criteria, like being an Indian citizen, at least 21 years old, and having a valid bank account.
  2. Choose Your Bank: Next, you pick a bank that offers overdraft facilities. Options include SBI, HDFC Bank, Axis Bank, ICICI Bank, Punjab National Bank, and others.
  3. Check Your Pre-Approval: Then, see if you’re pre-approved for an overdraft. If you are, you can access funds up to the approved limit without reapplying.
  4. Fill Out Your Application Form: After that, you fill out the bank’s application form. This may differ based on the type of overdraft you want (like salary, fixed deposit-backed, or property-backed).
  5. Provide Your Collateral (Optional): If you’re going for a secured overdraft, you provide collateral like a fixed deposit, insurance policy, or property.
  6. Submit Your Documents: You submit the necessary documents, such as proof of income, identity, and address.
  7. Wait for Your Approval: You wait for the bank to review and approve your application. This can take a few days to a week.
  8. Activate Your Facility: Once approved, you activate your overdraft by withdrawing funds up to the approved limit.
  9. Repay Your Amount: You repay the overdraft as needed. Interest is calculated daily on the outstanding amount.
  10. Monitor Your Account: You keep an eye on your account balance and overdraft limit to avoid any issues or penalties.

By following these steps, you can successfully apply for an overdraft account and manage your finances effectively.

Overdraft Fees

It will be varies countries to country. Especially Here We compare USA vs India in fee charges for overdraft account.

Overdraft FeesUSAIndia
Fee per Occurrence$10 to $40₹25 to ₹35
TriggerAccount balance below zeroAccount balance below zero
Insufficient Funds FeesUSAIndia
Fee per Item$25 or more₹35 or more per item
TriggerTransaction exceeds availableTransaction exceeds available
Minimum Balance FeesUSAIndia
Monthly Fee$5 to $20₹5 to ₹15 per month
TriggerBalance drops below minimumBalance drops below minimum
Overdraft Protection FeesUSAIndia
Annual Fee$15 to $25₹10 to ₹25 per year
Foreign Transaction FeesUSAIndia
Percentage of Transaction1% to 4%1% to 4% of total amount
Online Banking FeesUSAIndia
Additional CostYesYes
Penal ChargesIndiaUSA
Financial Default8% above applicable interest ratedata not available
Non-financial Default1% above applicable interest ratedata not available
GST and Other TaxesIndiaUSA
GSTCharged separatelydata not available
Prepayment and Closure FeesIndiaUSA
Fees2% of the limit sanctioneddata not available
Other ChargesIndiaUSA
Various feesApplicable depending on servicesdata not available

It’s essential to review the terms and conditions of any overdraft facility in both countries to understand the associated costs. If you need exact charges details, Contact your bank.