When you have a range of credit products in the loan market, choosing the right one can appear a difficult task. Whether you want your bank’s overdraft facility, a credit card or a personal loan for your lump sum need depends on what is best for you. Knowing how each borrowing method works and why you need the money is crucial before you can decide what to pick – credit card, overdraft or personal loan? Depending on your situational need, one may work a lot better than the other. Here we explain what overdrafts, credit cards and personal loans along with their pros and cons are.
Credit cards have a credit limit and allow you to spend up to your credit limit only. Most personal cards give you up to 55 days interest-free period for your purchases. You don’t pay any interest charge on things you buy with your card if you pay the entire statement balance within the due date each month. If you don’t pay the full statement balance, which is quite likely when you don’t have the cash flow, you have to pay significantly high-interest charges. Credit cards give you the benefit of earning reward points that you can redeem for purchases later on. Most credit cards come with an annual fee and you are charged an additional fee for withdrawing cash. It’s necessary to take a close look at the charges, therefore, before you choose a credit card to borrow money. Credit card debts affect your credit score and reduce your chances of loan approval by banks.
A bank overdraft allows you to access additional capital even when your account balance turns zero. With this facility, you can overdraw your current account up to an agreed limit. Banks offer overdrafts against salary, fixed deposits, traditional insurance policies, shares and bonds or property. Some banks also provide overdrafts against your salary account to help you with extra cash of up to three times the monthly payment. Banks, however, have a minimum and maximum limit in case of a salary overdraft facility and the repayment period differs from bank to bank. Lending banks define the overdraft limit based on your eligibility, creditworthiness and type of collateral. The advantage of an overdraft facility is that there are no pre-closure charges and you pay interest charges for the time and amount you use. But if you slip over an agreed limit, you risk high costs. If you default continually, you spoil your credit score, and the bank can withdraw the facility from you. A salary overdraft is fast with little documentation and attractive rates.
A personal loan is a short-term unsecured loan for a tenure ranging from 12 to 60 months and does not require any collateral. Such loans are taken from a bank or a non-banking financial company (NBFC) to meet personal needs. Whether or not a bank approves your loan depends upon your income, employment history and scope of repayment. A 750 credit score is a mandatory criterion for a bank loan. Borrowers can use online tools such as the personal loan EMI calculator, to assess the EMI amount for his loan tenure before applying for a personal loan. However unlike an overdraft facility that permits easy foreclosure, a personal loan is repayable monthly, and most banks charge a penalty for closing the loan before the agreed tenure. You will spend a one-time processing fee for a personal loan and fixed monthly interest charges, after that.
Whether it makes more sense to borrow cash using an overdraft line of credit, a credit card, or a personal loan largely depends on several factors:
– Do you have access to all these credit products?
– Do all the options give you enough available credit to fund your needs?
– Which credit option has a lower interest rate?
– What is the total fee for each credit line?
You will need to do your math for your specific situation to choose a less expensive product. You must also remember to make timely payments to maintain your credit score.
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