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Overdraft, loan or credit card, which option is better?

No one knows when and what kind of need may arise in life. Many times we all get stuck in a situation where there is a sudden need for money. At a time when hands are tight, a common man has roughly three options. Taking overdraft from bank, applying for personal loan or using credit card.

These three options help in raising money, but they all have their own conditions and costs. The question arises that which of these three options will prove to be the least expensive and most beneficial for your specific need?

Overdraft facility is fine for them

People often do not understand the overdraft facility properly. This is a special banking facility that banks provide to their trusted customers. If your banking record is clean then the bank allows you to withdraw more money than the balance in your savings or current account. This is called overdraft.

Suppose you have Rs 10,000 in your account and the bank has given you an overdraft limit of Rs 50,000, then you can withdraw up to Rs 60,000. However, this feature is not free. You have to pay interest on the extra amount you use (up to Rs 50,000 in our example). Therefore, before using it, definitely find out what the interest rate is. Finance experts believe that this option is more suitable for traders or businessmen who need money for a short time for daily work. For the common man, its limit is usually limited and sometimes its interest rate can be slightly higher than a personal loan.

Personal Loan is the best option

When there is a big expense, like a wedding at home, children's higher education, home renovation or a major medical emergency, then a personal loan is a popular option. This facility is available to both employed people and businessmen. In this, the bank gives you a lump sum i.e. a large amount at once based on your eligibility. You have to pay this money every month in the form of a fixed installment (EMI).

The biggest advantage of a personal loan is that you know how much money you have to pay every month, due to which your budget does not get disturbed. But, the bank does a thorough investigation of you before giving this loan. How is your credit score (CIBIL Score), what is your monthly income (salary), and will you be able to repay the loan? The loan is approved only after checking all these things. Experts advise that the interest rate on personal loan is lower than others, due to which you can save thousands of rupees.

Credit card help is an expensive deal

In today's era, the trend of credit cards has increased very rapidly. It works on the principle of 'Buy Now, Pay Later'. That means you are given a limit, you spend up to that limit and pay when the bill comes. The biggest advantage of a credit card is its instant availability. Some credit cards even provide the facility to transfer money directly to your bank account in a few seconds. But, credit cards are a double-edged sword. If you do not pay the entire bill on time, the interest charged on the remaining amount is very high, which can often reach 30% to 40% per annum. This makes it the most expensive of all the options. Therefore, credit cards should be used only when you are sure that you will pay the bill in full in the next month.

Take decision as per need

So the question remains, what to choose? Look, every option has its place. If you need a few thousand rupees and you can repay it in 1-2 months, then overdraft is fine, especially if you are a businessman. If the expense is large (lakh or two lakh) and you want 2-3 years to repay it, then a personal loan can be a cheaper option. At the same time, if you have to make some immediate purchase or pay a small bill and you can return the money only in the next month, then the credit card is going to be suitable.