Personal Overdraft - the Perfect Fit

Personal Loans

Updated on Dec 3, 2019

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In this article, we will explore how Credit Card and a unique personal loan, Personal Overdraft work and which one is a much better credit instrument for short-term credit requirements. Among different types of credit facilities accessible, most of the clients use credit cards or choose personal loans.

An individual may wonder that how a personal loan can match credit card's advantage. But, there are and we will know what are the advantages of using a better debt.

Credit Cards- Easy to swipe for immediate cash requirements
The main advantage of this credit card is that the interest-free period/grace period (for 30-60 times ) under which someone can avail credit as much as he wants from the pre-approved credit limit as determined by the lender or the credit card issuing company. After the grace period, a monthly interest is charged on unpaid credit that has been used or the outstanding amount.
While most of the credit card holders pay more attention to the yearly fees and other such charges while applying/using a credit card, it's actually the interest rate which are most critical and can make your credit card possession a pricey affair, even if not handled well.

Primarily, credit cards are easy substitutes for cash. An excellent tool to manage finances in addition to conveniently pay are the major reasons why credit cards are preferred by many. Credit card is used for transactional requirements or small-ticket buys.

How do credit cards work?
The finance charges on most credit cards from India are based on a monthly percentage interest rate and is calculated on a daily basis. Throughout the period or grace period, the accounts on credit cards do not bring in any finance charges.
If the total used amount is not paid prior to the cycle, then two options are supplied to the credit card holder. Either pay full amount due along with the interest or cover a minimum amount which is primarily the interest component. If one gets to the cycle of paying only minimal amount charges monthly and retains using their charge card, then the overall outstanding on credit card and the interest to be paid becomes really high.
Personal Overdraft Loan:
The Private Overdraft is a line of credit or loan centre which enables withdrawals to be made by loan holders in tranches from their credit limit and pay interest only on the amount withdrawn. However, the interest is charged on the daily basis instead on a cycle and is deducted on monthly basis, unlike credit card wherein you are at discretion of paying only minimum amount.
So what are the benefits of using a personal overdraft facility? To begin with, An overdraft facility includes nearly half of the interest rate (1.2 - 1.8% per month) as compared to interest charged by credit cards (3-5% per month). It aids in building better discipline in comparison to credit card.

Here are the 3 reasons that make Personal Overdraft better product than Credit Card
a) Lower interest rate
With tailored interest charges, which can be conducive to pay off the dues, personal overdraft is specifically designed with long-term payment option in mind. The yearly interest rates of 12-20% on personal overdraft is usually unlike 30-45 percent on credit cards' high interest rate. Therefore, as a revolving credit facility overdraft is a better option.

b) Availability of easy cash

A personal overdraft loan gives you access to cash in times of need at no additional charges. It gives you option to swipe your debit card as well as enables you to withdraw cash. It turns out to be expensive if one withdraws monies from credit cards.

c) You’re in control of your spending

You consent to a maximum borrowing limit with the lending company when you avail a personal overdraft loan. You pay interest outgo towards the withdrawn monies. This helps build better credit rating and is paying minimum due on credit card on monthly basis. The credit reporting agencies like Equifax CIBIL or Crif see it as an indicators of financial field such payments of interest on Private Overdraft loan.
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