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Term Loan vs Overdraft Facility

Highlights

  • Comparison between a Term loan and overdraft facility.
  • Some advantages and disadvantages of Term Loan and Overdraft.

So if you are confused about which one to choose from Term Loan vs Overdraft Facility. There is no need to worry about this blog, you can easily understand which one to choose.

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    Term Loan

    A term loan is a loan that can be paid back to the lender over a fixed period. The interest rate will be charged or fixed which depends on the market fluctuation basically. To process this term loan you need minimum documents and the entire process is hassle-free.

    Some Advantage of Term Loan

    • Get a flexible tenure option to repay the loan.
    • You can select your tenure period as per your income so that you can afford the EMI easily.
    • It required a minimum document for the loan process and this process of loan is hassle-free.
    • Get a competitive interest rate on your term loan.

    The disadvantage of Term Loan

    • The interest rate is high on your term loan.
    • It required many documents to qualify the loan process.
    • It charges many penalties so you can be aware of all the obligations.

    Overdraft Facility

    Overdraft facility is a facility in which the current account holders with the bank can withdraw more than the effective credit balance in their current account. The interest rate on overdraft facilities charged only on the amount withdrawn by the user. This overdraft facility is also commonly known as a credit line facility.

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    Advantage of Overdraft

    • It is very good for the seasonal business so that you can cover the shortfall of cash flow. 
    • You have to pay interest only on the withdrawal amount.
    • If you are a current account holder then you can apply anytime.
    • It requires less paperwork.
    • It is very flexible to avail and the interest rate is competitive.

    Disadvantage of Overdraft

    • There will be the risk of the reduction of the limit.
    • The higher Interest rate on the limit.
    • If you go beyond the limit then you have to pay a heavy penalty fee.

    Comparison Between Term Loan vs Overdraft Facility

    Let’s understand in detail with the help of the comparison between the Term loan and Overdraft. Which includes Definition, Purposes, What is it, Tenure Period, Rate of Interest, Interest Rate Calculation and Repayment.

    ParticularsTerm LoanOverdraft
    DefinitionIn simple language a term loan is a loan that can be used for business purposes, which will be paid back after a specific time period.Basically overdraft is a credit line facility. In which you can withdraw funds from your current account, even if your account balance is zero.
    PurposesThe main purpose of term loan is to expand your existing business.
    - Buying an Machinery
    - Construction
    - Hiring new Staff
    - Paying old Debts
    Basically the overdraft facility is used for day to day finance operations of the business.
    - Wages
    - Bill Payments
    What is itIt has a Borrowed CapitalIt offers credit facility
    Term PeriodGet the fund for Long TermAvail fund for Short Term
    Rate of InterestFixed and FloatingCharged on only used amount
    RepaymentEquated Monthly Installment (EMIs)Bank deposits
    Interest Rate CalculationInterest rate is calculated on Monthly BasisInterest rate is calculated on Daily Basis
    Current AccountIt is not mandatory to have current accountMandatory to have current account
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    Let’s understand the basic of Term Loan and Overdraft Facility

    Time Duration

    • Term loans are basically for the long term fund that starts from 1 month to up to 20 years. 
    • Overdraft facility is for the short term funds that will be of 15 days, 6 months 1 year. It is renewed every year.

    Security, Collateral and Guarantor

    • If you are taking a secured term loan that you have to put some assets as security but in case of unsecured loan, you did not provide any kind of security.
    • While taking an overdraft facility you did not require any kind of security or collateral.

    Conclusion

    With the overdraft facility, the borrower has to keep withdrawing the funds from your current account even if your account is zero. So on the other hand, if you have taken a loan, you will have to provide some security or you will have to pay through equal monthly instalments.

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