Personal loan vs. personal overdrafts
Thinking you’ll need some extra funds in the near future, but not sure how to manage your cash flow? Chances are you’ve heard of a personal overdraft before – but what exactly does it mean for your finances? And how does it measure up against a traditional personal loan?
How are they different?
A personal loan is a sum of money borrowed from a lender and repaid over an agreed-upon time frame, with interest and fees charged on top of that. You’ll make regular repayments, and if it’s a fixed-rate loan, your repayments will be the same amount each time.
A personal overdraft is a type of credit that is linked to your personal transaction account. It means you have access to additional funds when your bank account balance dips below zero. When your overdraft is initially set up with your bank, you’ll set a limit and this is the amount you have access to when necessary.
With an overdraft, you only pay interest on the funds you use, rather than all the funds available to you. That means if your overdraft limit is $2,000 and you only use $300 of that, you’ll only pay interest on the $300.
There’s generally no set repayment schedule or minimum repayment amount, but it’s recommended that you repay the entire balance as soon as you can to reduce the interest and fees charged.
Deciding which source of funds is the best for you may come down to your loan purpose, loan amount and unique financial circumstances.
Loan purpose
A personal loan is best for achieving big dreams or more pricey one-offs — your wedding, medical or dental costs, home renovations or consolidating debt.
A personal overdraft can help free up some room in your budget or manage your cash flow. You’ll pay interest on any funds outstanding so it’s best to use an overdraft when you know you’ll be able to pay off the balance in the short term.
Interest rates
A personal loan will include an annual fixed or variable interest rate that is built into your repayments. This interest rate might be personalised based on a few factors including your credit history, and will vary from lender to lender.
Personal overdrafts will only charge interest on the funds used. Many overdrafts will also feature a variable interest rate, so it’s best to keep on top of any rate changes so there are no unwelcome surprises in your bill.
What fees will you pay?
No matter how you borrow your funds, chances are you’ll be paying fees of some kind. So, what can you expect to pay?
Personal loan fees include things like origination fees, monthly fees, late payment fees, and sometimes early exit fees. Origination and monthly fees are generally built into your regular repayment. Late payment or early exit fees will be charged as they are incurred and are added on top of your regular repayment amount.
Personal overdraft fees are a little different. You’ll generally be charged an establishment fee and a monthly fee. These fees will be included in your monthly statement and should be paid off at the end of each month to best keep on top of your finances.