How an overdraft works
A limit is sanctioned — say ₹6 lakh. The money is not transferred to you; it sits available. You draw what you need, when you need it, and interest is calculated daily on the outstanding balance only. Repay some and the interest falls from the next day. Draw again later and it rises again.
That daily calculation is the mechanism that creates the saving. If you draw ₹2 lakh for six weeks and repay it, you have paid six weeks of interest on ₹2 lakh — not five years of interest on ₹6 lakh.
Two structures are common in India. An overdraft against your salary account, where the limit is set as a multiple of monthly salary and is typically modest. And a drawdown-style personal loan from an NBFC, which behaves the same way at larger limits — Bajaj's Flexi is the best-known version.
Which one actually costs less
| Your situation | Cheaper option | Why |
|---|---|---|
| One known expense, taken in full | Term loan | You use the whole amount, so pay the lower rate |
| Staged spending over months | Overdraft | Interest only starts when each amount is drawn |
| Uncertain total | Overdraft | No interest on the part you never need |
| Irregular income | Overdraft | Repay when money arrives, not on a fixed date |
| Consolidating debt | Term loan | A fixed EMI forces the balance down |
The pattern is simple enough: an overdraft wins when the drawdown is genuinely uneven, and loses when it is not. Because the rate on an overdraft is usually higher than on a term loan, drawing the full limit immediately gives you the worst of both — the higher rate and none of the flexibility benefit.
Did you know?
An overdraft has no fixed EMI, which means nothing forces the principal down. A term loan repays itself whether you think about it or not; an overdraft only reduces when you deliberately repay. Borrowers frequently service the interest each month, feel they are managing well, and find the balance unchanged two years later. If you take one, set your own repayment schedule and treat it as an obligation, because the product will not do it for you.
What to check before taking one
- How the rate compares. An overdraft usually prices above a term loan. Confirm the gap before deciding the flexibility is worth it.
- Whether there is a commitment or non-utilisation fee on the undrawn portion — some lenders charge for keeping the limit open.
- Renewal terms. Many overdrafts are annual facilities. Understand what happens at renewal and whether the limit can be withdrawn.
- Whether the full limit counts against you when you next apply for credit. Some lenders assess the sanctioned limit rather than the drawn balance, which can reduce your eligibility for a home loan later.
Expert insight
The real risk of an overdraft is not the rate — it is that an available limit sitting in your app does not feel like debt. A closed term loan is finished; an open overdraft is a standing invitation, and it gets drawn on for things it was never meant for. If you know that pattern applies to you, take the term loan even where the arithmetic slightly favours the overdraft. The product that ends is worth more than the one that flexes.
Eligibility
Broadly the same as a personal loan: income, credit score and existing obligations. Salary-account overdrafts additionally require the salary to be credited to that bank, which is the same gate described on our banks page — the lender needs to see the income directly.
- Credit score — 700+ at most banks. See what your band is worth.
- Income — steady and verifiable; a salary account with the lender helps considerably.
- Documents — KYC, income proof, bank statements. Full list on our documents page.
Please note
Money Bharti is a loan marketplace, not a lender. Overdraft structures, rates, renewal terms and fees vary considerably between lenders and change without notice — confirm everything in your sanction letter. Nothing here is a quote or a guarantee of approval.
Questions this page gets asked
What is a personal loan overdraft?
A sanctioned limit you draw from as needed, with interest charged daily on the drawn balance rather than on the full amount.
Is an overdraft cheaper than a personal loan?
Only if your drawdown is uneven. The rate is usually higher, so drawing the full limit at once costs more than a term loan.
How is the interest calculated?
Daily, on the outstanding balance. Repay part of it and the interest falls from the next day.
Is there an EMI?
Usually not a fixed one — often only interest is due each month. That is convenient and it is also why the principal can sit untouched for years.
Are there charges on the unused limit?
Some lenders levy a commitment or non-utilisation fee. Check before you sign.
Will it affect a future home loan?
It can. Some lenders count the sanctioned limit rather than the drawn balance when assessing your obligations.
Can I get one against my salary account?
Often, if your salary is credited to that bank. Limits are usually a multiple of monthly salary.
Is it good for consolidating debt?
Generally no. A fixed EMI forces the balance down, which is exactly what consolidation needs — see our debt consolidation guide.
Conclusion
An overdraft is a genuinely useful structure for uneven, staged or uncertain spending, and a genuinely poor one for a single known expense — where the higher rate buys you flexibility you will never use.
If you take one, decide two things at the start: how much you will actually draw, and the schedule on which you will repay it. Nothing in the product will do either for you, and that is the whole difference between it working and it quietly becoming permanent.
Compare an overdraft against a plain term loan
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Where This Page Sits
This is one page in a larger guide. The pillar covers the whole subject end to end — rates, eligibility, documents and the process — and links to every page in the silo.
Comparing products rather than digging into one? These are the main guides.
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Responsible borrowing note
All rates, fees and eligibility figures on this page are indicative market ranges for illustration and are not an offer. Approval, pricing and the sanctioned amount rest entirely with the bank or NBFC. Money Bharti is a loan marketplace, not a lender. Assess your repayment capacity honestly and read the sanction letter in full before signing. This content is general information, not financial advice.