Author
Home > Business > What is the Difference Between Bank Overdraft and Bank Loan?

Guilherme Mazui

•4 minutes to read

What is the Difference Between Bank Overdraft and Bank Loan?

🆚 Go to Comparative Table 🆚

The main differences between a bank overdraft and a bank loan are:

  1. Amount of borrowing: An overdraft is a variable amount of borrowing agreed with your bank up to a set limit, while a loan is a fixed amount of borrowing over a set term with regular repayments.
  2. Purpose: Overdrafts are typically used for short-term financial requirements, such as operating expenses or equipment purchases, and are better suited for short-term expenses of smaller sums. Loans, on the other hand, are better for longer-term, high-value purchases or investments.
  3. Interest rates and charges: Overdrafts often have higher interest rates compared to loans, and interest is calculated daily rather than monthly. Loans have fixed interest rates and repayment schedules, making it easier to plan expenditure and cash flow.
  4. Repayment terms: Overdraft repayments are not linked to a fixed date and can be made any time through a lump sum or regular payments. Loans have fixed terms and repayment schedules, which can help plan expenditure and cash flow but make them less flexible than an overdraft.
  5. Flexibility: Overdrafts can be more flexible than loans, as they allow you to borrow money as and when you need it up to a limit agreed between you and the bank. Loans have fixed terms and repayment schedules, making them less flexible than an overdraft.

In summary, overdrafts are suitable for short-term financial requirements and offer flexibility, while loans are better for long-term, high-value purchases or investments and provide fixed repayment schedules.

On this page
  • What is the Difference Between Bank Overdraft and Bank Loan?
  • Comparative Table: Bank Overdraft vs Bank Loan

    • Comparative Table: Bank Overdraft vs Bank Loan

    Here is a table comparing the differences between a bank overdraft and a bank loan:

    Feature Bank Overdraft Bank Loan
    Definition A credit facility provided by banks to their current account holders, allowing them to withdraw amounts over and above the credit balance in their account. Borrowed capital lent by a financial institution to either an individual or a business for a specific purpose, to be repaid over a period of time.
    Purpose Short-term finance to fulfill working capital requirements of a company. Long-term finance to acquire fixed assets like land, buildings, furniture, etc..
    Repayment Repayable on demand, usually agreed with the bank for a specific period. Repayable in equated monthly installments (EMIs) over a fixed period.
    Interest Rates Higher than bank loans. Lower than bank overdrafts.
    Flexibility Flexible borrowing and repayments, allowing users to decide how much money to use and repay each month. Less flexible, with predetermined repayment criteria set by the lender.
    Accessibility Available to current account holders with a specific bank. Available to anyone, regardless of whether they have a bank account with the lending institution.
    Security Generally secured by fixed deposits held by the account holder with the bank. May require collateral or security, depending on the loan type.

    In summary, a bank overdraft is a short-term credit facility provided to current account holders, while a bank loan is a borrowed capital lent for a specific purpose and repayable over a fixed period. Bank overdrafts offer more flexibility in borrowing and repayment, while bank loans have lower interest rates and are suitable for long-term financing needs.

    Read more:

    Guilherme Mazui

    Guilherme Mazui is graduated in journalism from the Federal University of Minas Gerais (UFMG) and a master's degree in Communication from the University of São Paulo (USP). In addition, he has experience in advertising writing and has worked as a content editor in several companies.