What is an Overdraft? | Bank Overdraft | Comparision of Overdraft With Personal Loan

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An overdraft is a credit offered by a banking institution when your account balance touches zero. With the help of the overdraft facility, you can continue withdrawing from your account even when the balance is insufficient or has no balance.
An account overdraft happens when you withdraw more money than the available balance. For example, if you withdraw Rs 25,000 from your account which had a balance of Rs 10,000, then your account is said to be overdrawn to the tune of Rs 15,000. To avail this facility, you will have to hold an overdraft account with your banker.
Comparison of overdraft with a personal loan:
i) Faster processing:
The processing of a personal loan takes a longer time as it involves a tedious procedure if you don’t have a pre-approved loan. You need to have a good credit score to secure a personal loan. On the other hand, availing the overdraft facility is much faster and hassle-free as compared to a personal loan.
ii) Flexibility:
Personal loans need you to be exceptionally punctual when it comes to repayment. On failing to do so, your credit score will be adversely impacted. On the other hand, overdraft accounts allow you to be flexible in repayments. You can stretch your repayment over the duration which comforts you.
The levying of interest starts from the day the amount is disbursed into your account in the case of personal loans. Even if you don’t make use of the funds, you will be charged with interest and have to pay monthly instalments. This is not the case with the overdraft facility as you have to repay only the amount that you have overdrawn and interest will be charged only on that amount. Thus overdraft is way more flexible than personal loans.
iii) The credit score is not hampered on overdrawing multiple times:
If you have availed a personal loan and have closed it, your credit score goes down. To avail another personal loan, you will have to go through the documentation procedure again, which decreases your credit score. On the other hand, the overdraft facility allows you to overdraw multiple times from the same account up to the amount sanctioned for overdrawing.
iv) No foreclosure charges:
If you foreclose a personal loan, then the lender would levy foreclosure charges. It is generally a percentage of the outstanding amount. It varies across banks. In the case of overdraft accounts, there are no pre-closure charges. You can fully repay the overdrawn amount without paying any penalties. Also, you need not repay via the EMI route. You can repay how much ever you want at any time.