What Is Difference Between Bank Loan And Overdrafts?

Give below are the differences between these two options.

Borrowing Term

The borrowing term is more flexible for an overdraft as compared to a bank loan. Here, when you apply for a bank loan, you will be required to specify the borrowing term as part of the application process.This is a crucial point as depending on the borrowing term, the interest rate will also be decided. These two factors are inversely proportionate, meaning, higher the interest rate, shorter will be period of borrowing. This period of borrowing term can last anywhere between a few months to a couple of years. With the overdraft facility, the borrowing term is only for a few days. With a prior agreement with the bank, you can withdraw an amount as accepted by the overdraft limit and repay the amount on demand by the bank or when there is enough funds.


Limited To An Account

The overdraft facility is only limited to the current account. Businesses and professionals who have a current account only can utilize this feature for any of their financial transactions. However, depending on the bank loan you need not require any bank account to repay off the borrowed finances. As part of the process when you apply for a bank loan, certain banks will provide you with the option of an account or direct payment via cheques. Loans like the gold loan need not require any account, especially if you approach a private financial institute.


Interest Rates

In both options, you will be required to pay back the loan with an added interest. However, the interest rates that are charged depend on different factors. With the overdraft facility, the interest rate is only charged on the amount that is over drawn. When it comes to the bank loan, various factors are taken into consideration when the interest rate is decided. Each different loan has different influential factors. Some of the most common factors include income, employment background, period of tenure, value of collateral provided and many more. It also includes the banking institute you apply for, as most banks offer competitive rates. All these factors must be considered before you apply for the bank loan. You can choose any banking institute either for the overdraft or bank loan interest rates.

Artcile Source: Artipot.com
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