The word “Term” itself refers to a loan, which is for a predetermined time period as opted by the customer before the disbursement where the requested or sanctioned amount is disbursed to the registered bank account of the customer. There are multiple loan deals like business loans, personal loans, etc. that contain nearly the same principle offered by PSU, private sector banks and even digital lenders like Rupeeredee loan, Moneytap, Kredx, etc. But the EMI calculation differs with the nature of the loan. To endow a simple illustration, let us take the instance of a scenario where the requirement of you as a user is to use the whole disbursed loan amount for a financial issue or monetary crunch wherein you must repay the principal and interest constituent in periodic intervals over a specific time period. This is known as a classic example of a term loan known as an auto loan, personal loan, business loan or even instant loan, which you can avail of through instant loan apps online based on your purpose and end usage.
In contrast, the overdraft option offers a pre-approved line of credit for a defined time period, where you as a user have the flexibility to request for the disbursement of the loan within a sanctioned limit as well as a period according to your need and repay when you have a surplus or fund availability. Note that the interest is computed just on the amount used and not on the whole line of credit.
Overdraft loan vs term loan – which is a better option?
Now, which is a good deal – an overdraft or a term loan? Let’s just simplify this by straightaway highlighting the major features of such products –
| Features | Overdraft – straight line | Overdraft – drop line | Term loan |
| Disbursement | Subsequent disbursement on request | Subsequent disbursement on request | One time disbursement |
| Credit limit | Available for sanctioned time-period | Keep on falling with the tenure | Used 100 per cent at the disbursement time |
| EMI | Consist of interest on the used amount | Consist of the interest on the used amount | Consist of principal as well as interest constituent on the disbursed amount |
| Part pre-payment fees | Usually, there is zero-part prepayment fees, but it depends on the lender | Usually, there is zero-part prepayment fees, but it depends on the lender | Might be chargeable based on the lender |
| Best used for | If your fund need is irregular and short-term, then you can avail the cushion of the line of credit | If you require funds for a long time period with a higher credit limit and simultaneously want to lower the interest constituent, then this is a good option. | In case you are aware of the end usage, then you may opt for this solution. |
What are the distinct kinds of overdrafts?
To know about overdrafts, first ensure to be well-versed with their distinct variants available in the market –
Straight-line overdraft option –
This is an option if you are one of those who want to maintain a regular lifestyle with unpredictable requirements and do not want to hold the burden of higher EMIs. The best thing about this option is that you get the flexibility to make the repayments whenever you have the available funds, and the interest constituent is computed just on the used amount and not on the whole disbursed limit. The loan EMI will actually be the interest constituent calculated on the used amount. The interest constituent will become applicable in case the principal stays unpaid. The repayment of the principal may be done as per your will if the interest constituent is getting paid.
Example – Imagine you received a limit of Rs 2 lakh for a span of 12 months, and you withdrew an amount of 1 lakh on the sixth month and before the eighth month you repaid the Rs 1 lakh that you borrowed. The EMI will get computed just on the interest constituent applicable on Rs 1 lakh. The line of credit of Rs 2 lakh stays sanctioned for you for the rest of the period. Often before the end of the tenure of 1 year, you must repay the principal along with the interest constituent.
Drop line overdraft –
Unlike the straight-line overdraft, this financial product is usually opted for a higher repayment tenure and for the high credit value wherein the user holds the same flexibility of using the amount from the pre-approved line of credit. But the difference basically lies in credit limit where the available line of credit continues to drop post every tenure. In the course of the tenure, the interest is computed just on the withdrawn amount and EMI contains both the interest and principal.
Example – Considering the similar example as above, for the sanctioned credit limit equaling Rs 2 lakh for a tenure of 1 year, the available limit will continue to drop after a considerable tenure proportionally and on the twelfth month the available credit limit will equate to zero. For the sanctioned credit limit equaling Rs 2 lakh for a span of 12 months, you can choose to withdraw Rs 1 lakh on the sixth month as the credit line continues to drop. You can repay at any time you want to, but the EMI will contain the principal and the interest that you have used for a specific time period.
What are the kinds of term loans available in the market?
Term loans are based on their loan repayment tenure. There are majorly 3 kinds of term loans – long-term, mid-term, and short-term.
Long-term loan – Such loans are considered unsecured and are provided for a repayment tenure of over five years. Such loans come with a flexible repayment choice and the interest rate are usually lower.
Mid-term loan – Mid-term loans are provided to ones for a repayment tenure of between 2 and 5 years. The required documents for such loans are comparatively way simpler than long-term loans. The rate of interest is even comparatively on the higher end.
Short-term loan – Such loans may be availed for a span of 1 to 2 years, as suggested by the name. The funds may be used for meeting the daily expenditures and for mitigating the working capital needs. However, such loans come with a little higher interest rate than mid to long-term loans.
