Term Loan Vs Overdraft Loan

Term Loan

A term loan is a loan that can be paid back to the lender over a fixed period. The interest rate will be charged or fixed which depends on the market fluctuation basically. To process this term loan you need minimum documents and the entire process is hassle-free.

Eligibility

• An excellent credit rating is required for the candidate.
• A reliable source of income is required of the applicant.
• At the time of loan application, the applicant must be at least 21 years old, and at loan maturity, he or she may not be older than 65.
• Various banks have different turnover requirements.
• The last two years should have seen a profit for the company.
• When applying for a loan, the borrower must present several sets of papers, each of which is specific to a given loan.

Documentation Required

1. A copy of your Business Registration
2. The Applicant’s and the Company’s KYC’s
3. For the last nine months, a Bank Statement
4. Promoter’s PAN Card
5. Promoter’s Aadhaar Card

Benefits of Term Loans

• Choose a flexible Loan Repayment Period.
• You may choose the length of your lease in accordance with your income to make it easier for you to pay the EMI.
• The financing process was hassle-free and only a minimal number of documents were needed.
• Obtain a term loan with a reasonable interest rate.

Drawbacks of Term Loan

• It has a high interest rate
• It requires several papers to qualify for the loan
• It imposes numerous penalties so you are aware of all the commitments.

Overdraft Loan

Overdraft Loan is a facility in which the current account holders with the bank can withdraw more than the effective credit balance in their current account. The interest rate on overdraft facilities charged only on the amount withdrawn by the user. This overdraft facility is also commonly known as a credit line facility.

Overdraft – Advantages

• It is excellent for seasonal businesses since it allows you to make up for cash flow shortfalls.
• Only the withdrawal amount is subject to interest payments.
• You may apply at any moment if you currently have an account.
• Less paperwork is needed.
• It may be accessed with great flexibility, and the interest rate is reasonable.

Overdraft – Disadvantages

• There is a chance that the cap will be lowered.
• The increased interest rate on the cap.
• A steep penalty cost must be paid if you exceed the limit.

Differences between Loan and Overdraft

S.No	CATEGORY	TERM LOAN	OVERDRAFT
1	Meaning	The loan refers to the fixed amount of money borrowed for a specified period, against a guarantee, which should be repaid with interest.	Overdraft is an arrangement whereby the customer is authorized to withdraw an amount greater than the balance shown as a credit in the current account, but only up to a certain limit.
2	Security or Collateral	In the case of overdraft facilities, no security or collateral is required.	Term loan can be both secured and unsecured.
3	What is it?	Borrowed capital	Credit facility
4	Process	An overdraft facility can be availed easily, as it does not require much paperwork and the amount is readily available. It is a one-time process.	In the case of a term loan, minimal documentation is required and disbursal is easy.
5	Source of	Long-term funds	Short-term funds
6	Purposes	1. Buying an Machinery 2. Construction 3. Hiring new Staff 4. Paying old Debts	1. Wages 2. Bill Payments
7	Interest	Charged on loan sanctioned.	Charged on amount overdrawn.
8	Calculation of interest	Monthly basis	Daily basis
9	Credit Facility	This is a credit facility offered by financial institutions having different terms and conditions on which interest is charged.	The same is the case with term loans
10	Repayment	Either on demand or on fixed monthly installments.	Through deposits in the bank account.
11	Is bank account Mandatory to avail benefit from this service?	No, it is not compulsory.	Yes, he / she must have a current account in the respective bank.
12	Interest Rate Calculation	Interest rate is calculated on Monthly Basis	Interest rate is calculated on Daily Basis
13	Current Account	It is not mandatory to have current account	Mandatory to have current account
14	Limit	Here, different credit limits are assigned to different customers, and any required amount can be withdrawn within the limit.	In the case of a term loan, the amount cannot be modified, and the customer can avail only the sanctioned amount.

Which is preferable?

The answer to this question may vary depending on the particular situation and company requirements. In certain cases, an overdraft might satisfy the requirements; in these cases, there’s no need to apply for a term loan because they entail a sizable sum that could become a burden. On the other hand, some costs and requirements can only be met through a term loan. For instance, if a company wants to expand, buy land, or buy machinery, it might use a term loan because the costs are high and the repayment time is set.

Overdraft loans are frequently praised as being safe and simple to get, and they are seen to be a better option for handling modest and temporary needs, such as marketing and advertising costs, salaries, rent, taxes, or other running costs, which typically last for 15 days to six months. Look for overdrafts that have lower interest rates and fees and that have more flexible repayment and borrowing alternatives. Loans are frequently thought of as planned emergency finances, whilst overdrafts are thought of as emergency ones.