If you have a bank fixed deposit and require funds, there is no need to break the deposit. You may instead take out an overdraft against your fixed deposit. Most of your investments, such as gold mutual funds, can be used to get an overdraft facility (OD).
But what if you don’t have any such assets or investments that could meet the requirement for money quickly. In this scenario, you might take out a personal loan or even a credit line.
A personal loan requires you to maintain repaying the EMI, but a Line of Credit may just need you to service the interest and pay the principal later. OD is similar to Credit Line, but unlike the latter, you do not have to use it to invest.
Both methods have pre-approved credit limitations that borrowers can borrow up to numerous times throughout the sanctioned term. Both of these options also allow borrowers to repay at their own pace, without incurring any prepayment penalties,” says Gaurav Aggarwal, Senior Director & Head, Unsecured Loans at Paisabazaar.com.
The repayment option is what makes OD and Credit Line loans appealing.
“In the case of credit lines, some lenders demand borrowers to repay in the form of EMIs, which include both principal and interest components,” explains Aggarwal.
Overdraft facilities are a typical feature provided by banks to current account holders such as businesses, corporations, and SMEs. Recently, numerous Fintech firms have begun to offer Credit Line facilities to consumers.
Before applying for a credit line, consider your requirement and the time frame in which you want the cash. You may be able to obtain a personal loan at a lower cost.
Here are some pointers from Aggarwal to help you decide whether to get a personal loan, an overdraft or a credit line — On the plus side, the greater repayment flexibility provided by credit line facilities makes them more suited for people who have regular cash flow mismatches.
However, if the interest rate on overdraft facilities given by banks through their savings, current, or salary accounts is lower than the interest rate on credit line facilities, such customers should consider them.