Short of funds? Overdraft limit loan vs personal loan vs credit card loan: Know which is better

If you are looking to take a loan and are eligible for all three loan options- personal loan, overdraft limit loan and loan on your credit card, then you should choose wisely from these options.

A personal loan is provided to the borrower without any collateral or security. (File photo)

A financial crisis may dawn on anyone and once it happens, people often explore multiple options before opting for the most viable way out. Whenever people get into a financial crisis, they tend to find an immediate help from family and friends and once this option is exhausted, they look towards lenders and with that comes the liability of timely payment to keep the credit score in check. 

If you are looking to take a loan and are eligible for these three loan options- personal loan, overdraft limit loan and loan on your credit card, then you should choose wisely from them. Each of these comes with its own pros and cons and one needs to thoroughly explore these to take a final decision. Before we conclude, let's understand each of these:

Personal Loan: A personal loan is provided to the borrower without any collateral or security. It is offered with minimal documentation and needs to be repaid in accordance with the agreed terms with the lender. The maximum tenure of a personal loan is five years for most banks and seven years in case of some lenders. The rate of interest varies from bank to bank and customer to customer based on their credit score. It could be either 'Reducing Rate of Interest' or 'Fixed Rate of Interest'. 

Overdraft Limit: An overdraft limit is a kind of personal loan with flexible features. It allows the borrower to withdraw an amount as per his/her requirements. There is also flexibility in repaying the withdrawn amount. The lender charges interest only on the utilized amount from the total sanctioned limit. It also allows one to withdraw and pay back multiple times within the sanctioned limit. For example, if the lender sanctioned an OD limit of Rs 4 lakhs, the money will be disbursed in a new account that the lender will open for you. The lender will give you access to the account and you can withdraw any amount out of the Rs 4 lakh and you will have to pay only interest on that amount. Say if the lender charges Rs 41 interest per day per lakh and if you have withdrawn Rs 2 lakh, you will pay an interest of around Rs 2460 per month. 

When it comes to repayment, you get a flexibility while repaying. Say, if you have Rs 20,000 spare fund in a particular month, you can deposit that in your account with the lender. Then you will have to pay interest for only Rs 1,80,000. Also, you can deposit and withdraw any amount multiple times within the credit limit offered to you. 

Credit Card Loan: A credit card loan is offered on a credit card owned by a user. The loan amount varies from card to card based on multiple factors including the card limit, card amount utilisation and credit score. A credit card loan is the quickest way to get a personal loan to meet the cash shortage as it's disbursed directly into a bank account within minutes on a nominal processing fee and requires no documentation.

Personal loan vs OD limit vs Credit card loan: Which is better?

Experts say that if a person is eligible for all three products, then he/she should choose the one with the lowest interest rate. However, if a person is in a dire need of money and needs it within minutes, then s/he should opt for a credit card loan.

Pankaj Mathpal, MD & CEO at Optima Money Managers, said that the OD limit is suitable for a person who can return the money in a short span of time. 

"The first differentiating factor should be the interest rate. However, the OD limit has a benefit as it allows for multiple withdrawals and deposits within the limits. The OD facility is good for those who need money for a shorter period and want flexibility in amount while repaying. However, in a personal loan, the tenure and EMI get fixed and the option is good for salaried people. A loan on a credit card is also like a personal loan but it often comes with a higher rate of interest compared to a personal loan. Thus, a credit card loan should be the last option," said Mathpal.