What is Overdraft and Loan?

An Overdraft can be described as a changeable amount of borrowing that has been agreed by the bank on a certain set limit. It allows you to borrow money whenever you wish to. This is what makes it ideal for the short term financial situations, such as immediately required purchases or expenses. You are required to pay interest on the amount borrowed only.

A loan is not variable and it can be defined as a fixed amount of borrowing over a set term with the regular repayments. With loans, fixed terms and repayment schedules are attached. Though, it can help an individual or business, plan their expenditure and cash flow, but are not as flexible as an overdraft. However, these are usually preferred for purchases that involve huge expenses.  There is a possibility of damaging the credit rating; one might also get involved into financial trouble if the loan is not paid back. There are loans that are secured and unsecured as well. The personal loans are unfortunately not secured while the secured loans are certainly secured against your asset.

Disadvantages related to taking out a loan:-

You need to consider the challenges or difficulties while you plan to takeout the loan:-

• It needs to be noted that the interest charged on a personal loan can be quite high if you are willing to borrow a small amount of money. So, you may consider it only if it is financially feasible. Otherwise, paying a higher interest amount can be quite difficult at times.
• The loans are generally associated with the high value assets; therefore, there is a greater chance of losing out a costly property, in case of failure to meet the repayments on a secured loan.
• Another disadvantage is that the loan repayments are generally not very flexible. This can turn out to be problematic if one is not able to make the payments within the stipulated time.
• You might have to pay an early repayment fee if you wish to repay the loan early.

 
Why Should You Opt For Overdraft?

There are certain reasons which make overdraft a better option as compared to the loan such as:-

• An Overdraft loan facility is involved with the flexibility in borrowing and the repayment options. This allows you to set a specific amount that you want to pay on a monthly basis. Thus, you can pay as per your convenience without having to worry much.
• For the short-term borrowing, it can serve to be a relatively cheaper option.
• It can turn out to be a good choice to access any kind of emergency funds. However, it is important that you choose to go for an overdraft that doesn’t charge any interest or fees.
• One can receive the overdraft loan easily from the banks be it a private or government bank. It gets transferred easily as the application is approved.

Apart from the various benefits of overdraft, there are few downfalls associated with it as well. These are:-

• In certain circumstances, the amount of money you can access can be lower as compared to the personal loans.
• If you go beyond the agreed limit, it can turn out to be an expensive method to borrow.

 
Conclusion:-
Even with a few disadvantages, Overdraft facility for business is a better choice over long term loan if you need to borrow a small amount, for a short time. This makes it great for use in the crisis situations or critical financial situations which can occur at any time. While considering any of these options, you need to analyze which one would be suitable for you as per your requirement and circumstances.