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Overdraft Loan vs. Credit Card vs. Personal Loan

Businessman utilizing overdraft facilities for urgent payment
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On some occasions, we get caught in a situation where we have additional expenditures than what we have on our bank accounts. Some banks offer assistance that they call an overdraft meant to lend us some money if our accounts do not have sufficient cash. This kind of loan, simply called overdraft, is not known and popular to many. This article explains this loan offering and weighs whether customers like you should prefer this over a credit card or a personal loan.

What is an Overdraft Facility?

Overdraft protection is a kind of credit offered by some banks in Singapore for customers whose accounts have reached zero. This allows customers to continue spending and paying their bills despite the insufficient funds in their account. Much like any other kind of credit, an overdraft facility is charged with an interest rate and usually have a single-time insufficient funds charge.

Overdraft facilities are often availed by businesses and entrepreneurs who do not have sufficient cash or working capital to make another purchase. To continue their operation, they have to avail of this service. In a way, this credit will help business growth and avoid any fluctuations and delays in its operations.

Aside from business owners, a borrower commonly uses an overdraft whose deposit is not enough to pay for emergencies or big purchases. Borrowers are allowed to take an overdraft as long as they qualify for the bank’s requirements.

Example of Overdraft Protection

One example of overdraft protection is if an account holder decides to write a check amounting to $1,000 to pay for his rent, but his account only has a $500 balance. If the holder has overdraft protection, the check he issued will not bounce. Instead, the $500 that is not in his account is called an overdraft credit.

Typically, the issuing bank will charge $15 as a transfer fee. An account holder has to pay this fee every time a debit transaction is made. This means then that the holder will have a balance of $485 ($500-$15). He has to pay off the $1,000 through a savings account, a credit card, or a credit line linked to the account.

Pros and Cons of Overdraft Facilities

One advantage of having an overdraft facility is that you can afford to pay for products or services even if you do not have the cash as of the moment. This is particularly significant in times of emergencies or important transactions. On the other hand, the disadvantage of an overdraft facility is that you may be charged with various fees. Aside from the transfer fee, you must also pay interest. If you fail to pay back the amount on time, you are continuously charged for the late payment and interest.

Another disadvantage of an overdraft is that you still have to ensure that the linked accounts should have enough deposits. Remember that if your backup finance source does not have sufficient, the transaction will not go through. At times of emergencies, being put in this predicament will be disappointing.

Overdraft Loan vs. Credit Card vs. Personal Loan

Here is a comparison table for you to see the differences between overdraft, credit cards, and personal loans. Note that each type of loan is meant for a specific kind of customer. Identify what kind of situation you are in, then choose which of these three is the best for you.

Advantages Disadvantages Best for
 Overdraft loan
  • Gives you extra funds at times of emergencies
  • You only pay for the interest if you use funds from your overdraft
  • You can find an overdraft facility that does not charge loan fees
  • You can easily overspend because you get easy access to funds
  • Has the highest interest rate out of the three options
  • Longest loan application process out of the three
  • Usually has monthly account fees and charges
  • Emergency situations and unexpected costs
  • Short term debts
  • Small purchases (at most $2,000)
 Credit card
  • It is faster to apply for a credit card than to get a personal loan or an overdraft
  • If you meet the bank requirements, you don’t need to pay an interest
  • Most credit card companies have reward programs
  • It has an annual fee
  • People tend to overspend because the money is extremely accessible
  • Many credit card holders are drowned in debt as it can linger for several months or years
  • Everyday shopping
  • Online transactions and payments
  • Small purchases (at most $5,000)
 Personal loan
  • Has a cheaper interest rate than a credit card
  • Loan terms (e.g, regular, principal, and interest repayment schedule) are manageable
  • You are forced to limit spending because you don’t get access to continuous funds
  • Loan application can be long and tedious
  • Loans are subject to interest
  • Aside from the interest rate, you also get to pay a service fee and other charges
  • Debt is spread over a long period of time which means that you will have to carry debt in months or even years
  • One big purchase (assets like car or property or for a property renovation)
  • Unexpected big expenses such as medical bills, etc.
  • Debt consolidation

Which is Right for You?

While overdrafts can save people from challenging financial situations, this credit option is not always ideal for a lot of us in Singapore. It is good for short term purposes, like buying assets for business expansion. Hence, it is crucial that borrowers only choose overdraft for their emergency needs, short term debts, and small purchases.

You can choose to apply for a credit card or ask for help from top licensed moneylenders for other financial services. You can also use a loan comparison site like Loan Advisor to know about better credit deals, more competitive interest rates, and the best loan agreement. If you are confused about which type of loan you want to take in certain situations and occasions, check out Complete Guide to Understanding Different Types of Loan, so you can have an informed opinion of what to do next.

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