Personal overdraft vs personal loan

Different types of financial products can help you achieve a variety of personal goals, from managing your everyday expenses to covering the cost of a large purchase. A personal overdraft may be able to help Australians with several similar problems as a personal loan, so which one may be the best choice for you?

What is a personal overdraft? 

A personal overdraft is a line of credit that’s attached to your everyday transaction account that kicks in when this account goes “into the red”. You’ll need to apply for an overdraft in advance, but once approved it will be available to use at a moment’s notice. Spending more money than you have deposited in your transaction account will activate a prepared overdraft, allowing you to access more funds up to a pre-set limit. This can allow you to live a little bit beyond your means when required, by giving you access to money when you need it in the short term.

Money you borrow with an overdraft will need to be repaid like any other loan, plus interest and fees. Because a personal overdraft is an unsecured loan, it will generally come with a higher interest rate than many personal loans.  You’ll only pay interest on the money you’ve accessed from your overdraft, but some lenders may charge a monthly fee for access to an overdraft whether you use it or not (though some only charge a monthly fee when your overdraft is active).  

What is a personal loan? 

A personal loan is where you borrow a sum of money to be repaid over time, plus interest and fees. Personal loans can be used to pay for large expenses, or to consolidate smaller debts, or for other purposes (check with the lender to see if there are any restrictions).  

Personal loans may be secured by the value of collateral, such as a car, equity in a property, or cash saved in a term deposit. This can help to lower the lender’s risk so you’re charged less interest, but this could mean losing the asset used as security if you default on your repayments.

Personal loans are often structured similarly to a home loan in that you agree to repay your loan to the lender over a pre-set loan term, often between 12 months and 5 years. During this loan term, you’ll repay the loan principal, plus interest charged at a fixed or variable rate, and any fees the lender charges.

Should I use a personal overdraft or a personal loan? 

The best choice between an overdraft and a personal loan for you will depend on your personal financial situation, as well as the goals you want to achieve.

Some Australians may find personal overdrafts useful for managing their everyday cashflow, especially when their bank balance is often on the low side. Having access to an overdraft can provide peace of mind that even if an unexpected expense arises such as car repairs or medical bills, you can cover it with your bank account. Depending on your situation, this peace of mind could be worth the fees and higher interest charges compared to a personal loan. That said, access to an overdraft could leave you tempted to overspend, which could put you at risk of being charged more interest and fees than you can comfortably afford to repay.

A personal loan may take a little more time to be approved and get access to the money than with a personal overdraft. That said, a personal loan may allow you to borrow a larger sum than an overdraft’s limit. This could be useful for making a large one-off purchase like buying a car or paying for a wedding or holiday. Because a personal loan has a fixed term length and repayment schedule, you can’t easily borrow more money and “top up” a personal loan. This means you’re more likely to get the debt paid off in time, and there’s less risk of overborrowing and ending up in a debt spiral.  

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