Busted: How Banks' Best-Kept Secret Can Save Your Finances

An overdraft facility is a type of loan that allows the customer to withdraw from the bank account even if the balance is zero. It serves as a financial safety net during times of crisis or when unexpected expenses come knocking. As the world of finance is flooded with various types of loans, it is essential to understand the benefits and the difference between an overdraft facility and a personal loan.

Unlike personal loans, overdrafts are linked directly to an individual's bank account. When the account holder withdraws money exceeding the available balance, the overdraft facility kicks in, thus preventing a transaction decline. However, it is crucial to note that banks typically set an overdraft limit for each account holder, beyond which transactions would still be declined.

When it comes to personal loans, they generally involve borrowing a lump sum of money. Typically, personal loans offer fixed repayment terms and fixed interest rates, depending on the amount borrowed, the borrower's credit score, and other factors. Personal loans can provide an influx of funds when a borrower needs them the most. They are suitable for borrowers who require large funds or a shorter repayment period. However, their fixed repayment terms may sometimes prove to be a drawback.

One significant advantage of an overdraft over a personal loan is the flexibility it provides to borrowers. An overdraft allows an individual to use the funds as and when required. It is possible for borrowers to make repayments or deposit funds as needed, and they are only charged interest on the amount of the overdraft facility used. Furthermore, overdrafts usually don't require the borrower to submit documentation for smaller amounts. In contrast, personal loans come with rigorous documentation processes, making the entire borrowing experience time-consuming and tedious.

One thing to consider is that overdrafts are charged interest only on the borrowed amount, which typically stands lower than that of personal loans. This translates to cheaper interest for overdraft users, provided the balance is kept low. Additionally, since the overdraft facility is connected to one's account, using and repaying an overdraft allows account holders to maintain a healthy credit score. Borrowing using an overdraft is often seen as more responsible than seeking external sources of credit. This practice, in the long run, contributes positively to the borrower's ability to secure more substantial loans or other types of credit in the future.