Individuals who are looking for borrowing money from the bank will be more interested in understanding the difference between loan and overdraft (OD) and which one is better to avail.
Both terms are used while availing amount from the bank for which interest will be charged depending on the duration.
Many business individuals or current account holders will be looking for OD and Loan facility from banks to meet their constant demand. Here are 5 differences between loan and overdraft.
Also read: Overdraft Against Fixed Deposit: 5 Things to Know
1) Overdraft facility is a credit given to the individual or company against his fixed deposit.
Loan is capital borrowed from bank
2) In Overdraft, the interest rate is charged only on the overdraft amount borrowed not on the limit of the overdraft facility. Means that you are pledging your own money to avail the loan.
In Loan, interest is charged on the entire amount borrowed. Here you provide other security as a back up to avail loan.
3) Usually, an overdraft is availed for the short duration, period depends on the borrower and the banker.
The loan is availed considering a long term say around 3-25 years.
4) Availing overdraft facility is hassle free as there is less documentation.
Availing loan can be tedious job, as you need to submit required documentation
5) Payment option in overdraft facility will be made in a lump some and can be closed anytime.
In Loan, payment is made as Equated Monthly Installments and on a regular basis.
It is better to you overdraft when you need a small amount and for a short duration and when you expecting amount shortly. An overdraft can be considered in a case of emergencies.