If you have a fixed bank deposit and you run out of funds, there is no need to break the deposit. Instead, you can go overdraft on your fixed deposit. An overdraft facility (OD) can be used against most of your investments such as gold mutual funds etc. In such a case, you can opt for a personal loan or even a Line of Credit.
In a personal loan, you will have to keep paying off the EMI while you have a line of credit, you may just have to pay off the interest and pay the principal later. OD is similar to a line of credit, but in the latter you do not have to use it for an investment.
âLines of credit and overdraft facilities have several similar characteristics. Both options come with pre-sanctioned credit limits, up to which borrowers can borrow multiple times during the sanctioned period. These two facilities also allow borrowers to repay according to their repayment capacity, without incurring prepayment charges, âsays Gaurav Aggarwal – Senior Director and Head of Unsecured Loans, Paisabazaar.com
What makes OD and line of credit loans attractive is the repayment option. “Regarding interest charges, borrowers only bear interest charges on the amount borrowed until it is repaid, and not on the amount sanctioned,” Aggarwal informs.
âIn the case of lines of credit, some lenders require borrowers to repay in the form of EMI, comprising both principal and interest,â Aggarwal adds.
Ease of overdraft is a common feature extended by banks generally to their current account holders such as businessmen, companies and SMEs. Lately, several fintech companies have started offering line of credit facilities even to individuals. âFintech lenders offer secured and unsecured lines of credit. Unsecured lines of credit are generally offered to salaried applicants based on their credit rating and monthly salary, âAggarwal explains.
The interest rate on lines of credit is usually lower than what you have to pay with credit cards. You can take advantage of a line of credit and also get the amount on your credit card. âSome lenders also offer lines of credit through cards where the sanctioned credit limit is credited to the card, which can then be used at ATMs to make cash withdrawals, swiped at the point of sale to make transactions out of the box. online or used to conduct online transactions, âAggarwal adds.
Before taking advantage of the line of credit, assess the need and the period for which you need the funds. A personal loan can be offered to you at a lower cost. âLine of credit facilities generally have higher interest rates than personal loans,â says Aggarwal.
Here are some clues from Aggarwal in deciding whether to go for a personal loan, overdraft or line of credit – On the positive side, the higher repayment flexibility offered by line of credit facilities makes them more suitable for people facing frequent cash flow mismatches. However, these consumers may also consider overdraft facilities offered by banks through their savings, current or salary accounts, if these facilities cost them less than credit facilities. They may also consider personal loans offered by some lenders in the form of overdraft facilities.