Overdrafts versus personal loans: pros and cons

When you only need extra funds, what suits you better… Overdrafts or a personal loan? Weigh up the pros and cons of each here.

15:11 19 October 2013

During tough times, making ends meet becomes more difficult and people opt to apply for more credit. Without assets to pledge as collateral, your options are mostly limited to overdrafts or a personal loan. To help you determine which one is more suitable for your needs, let us compare overdrafts and personal loan.

What is Overdraft?

An overdraft is an extension of credit where an individual is still allowed to withdraw funds from his account even if the account has no more balance. The amount of overdraft allowed for an individual is to be agreed on between the account owner and the concerned bank. However, in case where the individual exceeded his overdraft limit, then there will be some additional charges.

Advantages of Overdrafts

• An overdraft is a fast and simple solution for a short term cash deficiency.

 

• Some overdrafts are interest free but are only limited to smaller amounts or to those attached to a pupil account.

Disadvantages of Overdrafts

• An overdraft is not for a long-term agreement.

 

• There will be monthly charge for using the authorized overdraft. Terms will be presented by the bank. Sometimes, the penalty that is usually charged is computed on a daily basis over the agreed amount of loan.

 

• The bank can at any time revoke the agreement between the individual regarding agreed overdraft limit.

 

• Frequent usage of overdraft can affect the credit worthiness of the borrower as it will reflect in your credit score.

What is a Personal Loan?

A personal loan is a loan approved based on credit history as well as the borrower’s salary.

Advantages of Personal Loans 

• The amount of money that can be borrowed is higher than that of an overdraft.

 

• The interest rate on the entire duration of the loan is fixed allowing you to manage your budget more effectively. Repayment period could be 1 to 3 years unlike in overdraft you don’t know when you can finish repayment.

Disadvantages of Personal Loans 

• An early repayment could mean paying additional charges.

 

• The interest rates are usually higher with a smaller personal loan.

Personal loans or overdrafts? Whatever you choose, keep in mind to pay the loan on time and in full to avoid affecting your credit score negatively.