Overdraft facility or loan? Find the option that suits you best

Expenses can arise out of nowhere—whether it’s a sudden medical bill, urgent home repair, or a gap in monthly cash flow. Choosing the right borrowing option in such situations can make all the difference, and many people consider a personal loan or an overdraft (OD) facility.

While both options offer quick access to funds, their structure, flexibility, and repayment methods differ significantly. This article breaks down how a personal loan compares with an overdraft facility, helping you understand which one fits better for different emergency needs.

What is an overdraft?
 

An overdraft facility allows you to withdraw more than your available bank balance up to a sanctioned limit. It’s a flexible option for short-term financial needs and is commonly used in emergencies.

1. Basic setup –

The overdraft facility is usually linked to your savings or current account. Depending on the type, it can be either secured or unsecured.



2. Secured overdraft –

When linked to a fixed deposit (FD), the overdraft is backed by your FD as collateral. The credit limit is typically 85–90% of the FD value, and the interest rate is just 1–2% higher than the FD rate.



3. Unsecured overdraft –

If not backed by an FD, the overdraft is granted based on your income, account history, and credit score. These come with higher interest rates and stricter eligibility.



4. Interest and usage –

You’re charged interest only on the amount you use, not the entire approved limit, making it cost-effective for short-term borrowing.

Once approved, a separate overdraft account is created, allowing you to borrow, repay, and reuse the funds repeatedly within your credit limit. This makes an overdraft a form of revolving credit, where funds become available again as soon as you repay what you’ve used.

How personal loans work
 

A personal loan gives you access to a lump sum amount of money you repay in fixed monthly instalments. It’s often preferred for larger or planned expenses where structured repayment works better than the flexibility of an overdraft facility.

1. Fixed disbursal –

You receive the entire approved loan amount upfront, which is ideal for high-value needs like medical treatment, education, or urgent home repairs.



2. Defined repayment–

The loan is repaid through monthly EMIs over a pre-agreed tenure, typically ranging from 9 to 60 months.



3. No collateral required–

Personal loans are usually unsecured, so you don’t need to pledge assets like an FD or property.



4. Interest structure–

Interest is charged on the full loan amount from the start, regardless of how much you end up spending.



5. One-time access–

Unlike an overdraft, a personal loan doesn’t offer revolving credit. If you need more funds later, you must apply for a top-up or a new loan.

Personal loans work well when you need a substantial amount and prefer a clear repayment plan with a fixed schedule.

Overdraft vs. personal loan: How do they differ?
 

Emergencies demand quick decisions—but to choose well, you need to see how both options compare. Here’s a breakdown to help you evaluate what fits your situation best.

The key difference between a loan and an overdraft facility lies in how interest is applied and how funds are accessed. Personal loans offer structure; overdrafts provide flexibility. The right choice depends on your urgency, borrowing style, and repayment comfort.

FIRSTmoney: The best of both worlds
 

Some options combine the structured repayment of a personal loan with the flexibility of an overdraft facility. FIRSTmoney, the smart personal loan from IDFC FIRST Bank, is one such offering.

It allows you to take multiple loans as your needs evolve—without starting the entire application process from scratch.

It functions much like a personal overdraft loan—a flexible borrowing solution that adapts to your needs as they arise.

How to choose a personal loan based on emergency scenarios
 

Not every financial emergency calls for the same solution. Depending on the urgency, amount needed, and repayment capacity, one option may suit your situation better than the other.

1. Short-term cash flow gaps –

An overdraft facility is ideal for covering temporary shortfalls, like when your salary is delayed, or you're waiting on a payment. You borrow only what’s needed, and interest applies only to that amount.

1. Large one-time expenses –

Personal loans are better suited for bigger needs, like paying for surgery, buying essential appliances, or funding education fees, where structured EMIs make repayment manageable.

1. Multiple unexpected needs –

For ongoing or repeat expenses, an overdraft facility offers reusable credit. Some personal loans, like FIRSTmoney, also support easy top-ups.

1. When speed matters most –

Overdrafts are instantly available if already sanctioned. But if you don’t have one, a digital personal loan (like FIRSTmoney) may be faster than setting up an overdraft account.

1. Avoiding costly mistakes –

Don’t let urgency force you into a high-interest or poorly structured option. Borrow based on repayment comfort, not just speed or ease.

Both options are useful, but context is key before borrowing. It helps to understand your eligibility and the documentation each option requires. That’s up next.

Personal loan vs. Overdraft: Eligibility, documentation & what to consider
 

Before choosing a borrowing option, it helps to understand who qualifies for each, what documents you’ll need, and what to keep in mind during the decision process.

1. Who can apply?

2. What documents are required?

3. What should you keep in mind?
 

i. Loan structure vs. flexibility – An overdraft facility lets you borrow small amounts repeatedly, while a personal loan offers a lump sum with fixed EMIs.

 ii. Speed of access – If you already have an overdraft facility linked, it’s immediate. If not, FIRSTmoney offers a fast alternative with digital approval.

 iii. Repayment comfort – Choose based on how predictable your income is and whether you prefer fixed or flexible repayment.

 iv. Multiple loan options – Overdrafts offer built-in flexibility. Some personal loans, like FIRSTmoney, also allow multiple loans without reapplying or changing the interest rate.

v. Borrow responsibly – Don’t be guided by ease or speed alone. Choose the option that aligns with your financial planning.

Choosing the right borrowing option isn’t just about eligibility or documentation—it’s about how well the product fits your financial situation. Whether you prioritise flexibility, speed, or structured repayment, understanding these basics can help you make a more confident and informed decision.

Conclusion
 

Personal loans and overdrafts both offer fast financial support, but their suitability depends on your needs. Choose a personal loan when you want structure and higher amounts; opt for an overdraft facility when you need flexible, short-term access to funds.

Evaluate your repayment capacity, the urgency of your need, and the ease of access. For a reliable personal loan option that offers flexibility and quick disbursal, explore FIRSTmoney, an instant online personal loan from IDFC FIRST Bank, and apply in just a few steps.