Banks offer several types of loans. In addition to personal loans, which are used for individual needs, banks provide various financial products like overdraft facilities and flexi loans to meet different financial requirements.
Understanding the differences between these options can help you determine which is best for your needs.
Overdraft Facility: Banks provide an overdraft service that allows you to withdraw money even when your bank account has insufficient funds or is overdrawn.
The bank sets a specific overdraft limit, which you can use to access additional funds. Interest is charged only on the amount you overdraw.
With an overdraft, you can withdraw funds at your convenience and repay them according to your schedule. This credit facility is directly linked to your bank account, allowing easy access to funds within the pre-approved limit.
Dropline Overdraft Facility: In a dropline overdraft, the initial total credit limit decreases gradually each month. After a certain period, this limit eventually reaches zero. The bank or NBFC determines whether the credit limit will reduce monthly, quarterly, biannually, or annually.
For example, suppose you receive an initial overdraft facility of ₹6 lakhs with a three-year tenure under an annual dropline plan.
You can withdraw this amount either in a single withdrawal or multiple installments before the end of the year.
Each year, the credit limit decreases so that it would be ₹4 lakhs after the first year, ₹2 lakhs after the second year, and it would reach zero after three years. This can be viewed as a hybrid plan combining aspects of both a term loan and an overdraft facility.
Personal Loan: A personal loan is a term loan you must repay through equated monthly installments (EMIs). Banks or financial institutions provide a lump sum upfront, which you repay in equal installments beginning the following month.
Flexi Loan: A flexi loan can be considered a hybrid between a personal loan and an overdraft facility. In this arrangement, the bank or NBFC deposits a pre-approved loan amount into your account.
You can withdraw and utilize this amount as needed, and repayment can be made at your convenience. Importantly, you only pay interest on the amount withdrawn; any remaining balance is interest-free.
Which Option is Best: a flexi loan, Overdraft, or Personal Loan? A flexi loan typically has a lower interest rate and is readily available, making it a good choice for those needing to withdraw a large sum quickly.
Its flexibility regarding pre-payment also makes it suitable for individuals who may not have immediate funds for repayment.
The overdraft facility is ideal for those with irregular cash flows, who can access credit whenever required.
A personal loan should generally be considered a last resort. It is typically taken for specific needs like medical expenses or travel and tends to have higher interest rates than the other options.
In summary, choose the loan type that best fits your financial situation and needs.