overdraft or personal loan

Which is the Better Personal Loan - Term Loan or Overdraft?

January 17, 2023 • 4173 views

A Personal Loan is a popular choice when it comes to borrowing money. Within a Personal Loan, both term loans and overdrafts are common options. But which one is better suited to your needs? In this blog, we will explore the key differences between term loans, overdrafts, and overdraft loans. Read on to know more!

Term Loan vs. Overdraft: Key Differences

There are several differences between a term loan and an overdraft facility. Let's understand the key differences between them to make an informed decision:

Term Loan

Overdraft

The loan amount, as well as the repayment schedule, is fixed. 

An overdraft facility involves a revolving credit line with a borrowing limit and no fixed repayment schedule.

Collateral is required in most cases.

Overdraft is available with or without collateral.

Interest is charged on the entire loan amount from day one.

Interest is charged only on the amount utilised.

The interest is calculated every month, and the repayment is done on a monthly basis through EMIs.

The borrower must pay interest on a daily basis, and the overdraft loan can be repaid in multiple installments, or one go, depending upon the customer's preferences.

The rate of interest is comparatively low.

The rate of interest is relatively higher than that of a term loan.

The period for which a term loan is given generally ranges between 60 to 240 months or more.

Overdraft facility involves a shorter duration ranging from 12 to 72 months.

Term loans like home loans and education loans enjoy tax exemption benefits.

There is no tax benefit in case of an overdraft facility.

 

Pros and Cons of Term Loans and Overdrafts

The major pros and cons of Term Loans and Overdrafts are listed below to help you determine which option aligns with your financial goals:

 

Term Loan

Overdraft Loan

Pros

  • Fixed repayment amount and schedule provide budgeting clarity
  • Suitable for one-time expenses
  • Interest rates are lower as compared to overdrafts
  • Can serve as an effective debt consolidation tool
  • Flexibility to borrow any amount within the borrowing limit
  • Interest is charged only on the utilised amount, potentially saving money
  • Offers instant access to funds when needed
  • Suitable for businesses with variable needs

Cons

  • Requires collateral, which can be a disadvantage for some
  • Prepayment may come with penalties or charges
  • May not be suitable for businesses with fluctuating cash flow
  • Lengthy approval process and documentation requirements
  • Higher interest rates compared to term loans
  • Risk of overspending and building up debt
  • Requires a good credit score
  • Lower maximum borrowing limits compared to term loans

 

Also Read: Understanding Term Loans: A Detailed Guide

Term Loan or Overdraft: Choosing the Right Option?

To choose the right Personal Loan option, consider your specific financial needs. If you have a fixed expense, such as renovating your home or purchasing a vehicle, a term loan is suitable. The structured repayment plan ensures you can repay the loan over the agreed-upon term.

On the other hand, an overdraft loan would be more appropriate if you require the flexibility of accessing funds as and when needed. Assess your financial situation and goals to determine the ideal choice for you.

Who is Suitable for Which of the Two?

Term loans are best suited for individuals with one-time expenses or specific financial goals. A term loan is a good fit if you need money to pay for a wedding or education or consolidate your existing debts.

Overdraft loans are favourable for individuals who require a credit line to manage regular or unpredictable expenses. If you have varying monthly expenses, such as medical bills or home repairs, an overdraft provides the necessary flexibility.

Types of Term Loan & Overdraft Loan

Types of Term Loan

Term loans are classified based on their loan tenure. There are mainly three types of term loans, short-term loans, medium-term loans, and long-term loans.

1. Short-term Loans:

These loans can be availed of for 12 to 24 months, as the name suggests. The funds can be used to manage day-to-day expenses and fulfill working capital requirements. However, these loans come with a slightly higher rate of interest as compared to medium and long-term loans.

2. Medium-term Loans:

Medium-term loans are given to borrowers for a tenure of up to 24 to 60 months. The documents required for these loans are comparatively simpler than long-term loans. The interest rate is also comparatively higher.

3. Long-term Loans: 

These loans are unsecured and are offered for a tenure of more than 60 months. These loans come with flexible repayment options, and the rate of interest is lower.

Types of Overdrafts

To explore more about Overdraft (OD), let us understand the variants of OD that are generally offered by lenders.

1. Straight-line Overdraft

This product is for individuals who want to maintain a day-to-day lifestyle with unpredictable needs and doesn't want to have the burden of bigger EMIs. The best part of this product is that you have the flexibility to repay whenever you have the funds available, and the interest is calculated only on the utilised amount and not on the entire sanctioned limit. The EMI will be the interest computed on the utilised amount. The interest will be applicable if the principal remains unpaid. The payment of the principal amount can be done at the borrower's will if the interest is being paid.

Illustration: Imagine you got a sanctioned limit of Rs. 2 lakh for 12 months; you withdrew 1 lakh on the 6th month, and before the 8th month, you repay Rs. 1 lakh. The EMI will be computed only on the interest amount applicable on Rs. 1 lakh. The credit line of Rs. 2 lakh remains sanctioned for you for the remaining period. Before the end of the term of 12 months, you need to pay back the principal and interest.

2. Drop-line Overdraft

Unlike straight line OD, this product is generally opted for longer tenure and for high credit value, here the user has the same flexibility of utilising the amount from the pre-approved credit line, but the difference lies in the credit limit where the available credit line keeps on dropping after every tenure. During the tenure period, the interest gets calculated only on the withdrawn amount and the EMI consists of both principal and interest.

Illustration: Taking the same above example, for a sanctioned limit of Rs. 2 lakh for 12 months, the available credit limit will keep on dropping after subsequent tenure proportionally, and on the 12th month, the available limit will be 0. For a sanctioned limit of Rs. 2 lakh for 12 months, you can withdraw Rs. 1 lakh on the 6th month as the line keeps dropping. You can repay anytime you wish, but the EMI will consist of principal and interest for the utilised period.

Also Read: How to Calculate Interest on a Loan?

Eligibility Criteria & Documents Required for Them

Eligibility criteria for term loans and overdrafts vary between lenders but typically depend on factors such as credit history, income, employment stability, and age. For both options, you may be required to provide identification proof, income statements, address verification documents, and bank statements. Meeting these criteria and providing the necessary documents will increase your chances of approval.

For Term Loan:

  • Minimum age must be 21 years
  • Must provide proof of identity, address, and income
  • Should possess a good credit score, typically above 600
  • Collateral is required

For Overdraft Loan:

  • Minimum age must be 18 years
  • Must provide proof of identity, address, and income
  • Should possess a good credit score, typically above 650
  • Collateral is required for availing of secured overdraft

How to Apply for Term Loan or Overdraft Online?

Applying for a term loan or overdraft online is convenient and time-saving.

Step 1: Start by researching lenders who offer these types of Personal Loans.

Step 2: Compare interest rates, loan terms, and eligibility criteria. Once you have chosen a lender, visit their website and locate the online application form.

Step 3: Fill in the required details accurately and upload the necessary documents.

Step 4: Submit the application and wait for approval.

If approved, the funds will be disbursed to your bank account.

To apply for a Personal Loan with Poonawalla Fincorp, you can follow the steps mentioned below:

  • Click on the 'Apply Now' button.
  • Enter your details and upload your documents when filling out the application form.
  • Click on the 'Submit' button.

To Conclude

Choosing between a term loan and an overdraft loan depends on your financial needs and goals. Understand the key differences, weigh the pros and cons, and assess your suitability for each option. Consider the types of term loans and overdrafts available and check the eligibility criteria and required documents.

Applying for a Personal Loan online is a convenient process, allowing you to access funds quickly and easily. Connect with Poonawalla Fincorp to get exclusive offers and improved terms on your Personal Loan.

Frequently Asked Questions:

  • Can I apply for a Personal Loan online?

Yes, most lenders provide the option to apply for a Personal Loan online. Lenders like Poonawalla Fincorp offer online applications for personal loans. These online applications provide convenience and faster processing, saving time and effort.

  • What documents are required to apply for a Personal Loan?

Generally, you will need identification proof, income statements, address verification documents, and bank statements. The specific documents required may vary between lenders, so it's important to check their requirements before applying.

  • How long does it take for a personal loan to be approved?

The approval process can vary depending on the lender and their documentation requirements. Usually, it takes anywhere from a few hours to a few days for a Personal Loan to be approved.

  • Can I use an overdraft for long-term financing?

Overdraft loans are generally designed for short-term financing needs. If you require long-term financing, it is advisable to explore other loan options, like term loans that will better suit your needs.

  • What happens if I default on an overdraft repayment?

Defaulting on an overdraft repayment can have serious consequences, including a negative impact on your credit score, penalty charges, and legal action by the lender to recover the outstanding amount.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Business Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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