Bank Overdraft vs Bank Loan
If you are a small business owner, you know how difficult it becomes to manage shortfall of cash flow. At times it becomes necessary to look for alternatives such as a bank loan to meet the demands of business. However, securing a loan for a business need is not an easy joke as many before you have found out. Unsecured loans are rare, and even if you are ready to take the risk of pledging your valuable assets, the banks are not necessarily inclined to oblige you. This is when they charge a high rate of interest on any loan they do offer. Another option that is easy and flexible to need short term demands of small amounts of money is a bank overdraft which is a facility that many banks give to their current account holders. What are the differences between bank overdraft and bank loan?
Overdraft is a facility provided by banks to draw up to a predetermined limit in cases of emergency. If you do not have this facility attached with your account, you can request the bank to set it up which they promptly do if your bank record is fine and regular. Overdraft facility attracts a small setting up fee and then you are free to issue a Cheque up to the borrowing limit you have got from the bank even if you do not have money in your account. Of course you have to return the money at your convenience and the bank charges a set rate of interest on the borrowed amount till the time you repay it. You can deposit smaller amounts and interest is levied on the difference that exists between the limit and the money in your account.
The major difference between an overdraft and a bank loan is that a loan is for a fixed amount and is for longer durations where you pay an EMI to return the loan. On the other hand, an overdraft is emergency borrowing from your own account and is usually for smaller amounts of money and shorter durations. The rates of interest on a bank loan and an overdraft vary between different banks and you must confirm them before going in for either a bank loan or an overdraft. In any case, one should treat an overdraft as a loan and repay as soon as possible to be in the good books of the bank.
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In brief: Bank Overdraft vs Bank Loan • While a loan is for large amount of money and for a longer duration, bank overdraft is a borrowing facility from the bank to its current account holders that allows one to draw money to meet emergencies in business. • One has to repay both a loan and overdraft, but in the case of a loan it is through an EMI while one is at liberty to repay in installments and interest applies only the rest amount from the overdrawn money. • While one has to apply for a loan afresh every time one needs money, overdraft is a continuing facility from which one can draw money anytime depending upon exigencies.
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