Term Loan vs Overdraft Facility
Last Updated : Feb. 13, 2020, 6:18 p.m.
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.
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 The interest rate on overdraft facilities charged only on the amount withdrawn by the user.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.
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.
| Particulars | Term Loan | Overdraft |
|---|---|---|
| Definition | In 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. |
| Purposes | The 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 it | It has a Borrowed Capital | It offers credit facility |
| Term Period | Get the fund for Long Term | Avail fund for Short Term |
| Rate of Interest | Fixed and Floating | Charged on only used amount |
| Repayment | Equated Monthly Installment (EMIs) | Bank deposits |
| Interest Rate Calculation | Interest rate is calculated on Monthly Basis | Interest rate is calculated on Daily Basis |
| Current Account | It is not mandatory to have current account | Mandatory to have current account |
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.