Term loan –
“Term” in a loan is a predetermined period as chosen by you i.e., the customer before disbursement where a requested or sanctioned amount is processed to your registered account. There are numerous loan offerings like business loans, personal loans, etc. that consider this principle. But the EMI calculation differs with the loan type and nature. To endow you with an illustration, consider you have availed a loan, i.e., an auto loan, so you will have to repay the principal along with the interest constituent over the predetermined time period in the form of periodic EMIs. One of the classic examples of the term loan is a personal loan from any lender may it be Kreditbee, Moneyview or State Bank of India, Punjab National Bank, Axis Bank, etc. or a home loan, loan against property, etc.
Overdraft –
In contrast, an overdraft option offers a pre-approved line of credit for a predetermined period. Here, you as a user get the flexibility to ask for the disbursement within a sanctioned limit and period according to your need and repay the same whenever you have surplus funds available. Note that the interest constituent is computed just on the amount used and not on the whole line of credit.
Overdraft vs. term loan – Which is better?
Let’s simplify it by highlighting the features of the financial products –
| Features | Term loan | Overdraft – Straight line | Overdraft – Dropline |
| Disbursement | One time disbursement | Subsequent disbursement upon request | Subsequent disbursement upon request |
| Credit limit | 100 per cent of the proceeds are disbursed at once | Available for just the sanctioned time-period | Continue dropping with repayment tenure |
| Loan EMI | Consist of interest and principal constituent | Consist of just the interest constituent on the amount used | Consist of just the interest constituent on the amount used |
| Part prepayment fees | Might be chargeable based on the lender | Usually, there are zero-part prepayment fees but are based on the lender | Usually, there are zero-part prepayment fees but are based on the lender |
| Best used for | In this case, you are aware of the end usage and not looking to manage the EMI computation like in the case of overdraft | If the fund need is irregular for the short term but you are looking to create a cushion with a line of credit | If you require funds for a higher time period with higher credit limits and simultaneously want to lower the interest constituent |
What are the distinct kinds of overdraft options?
To know more about overdraft options, let’s try and understand the variants of overdraft that are usually offered by a lender –
Straight line overdraft option –
This financial product is for the one who wants to maintain a daily lifestyle with unpredictable requirements and does not want to witness the burden of higher loan EMIs. The best part here in this financial product is that you get the flexibility to make the repayment whenever you get the available funds, and the interest constituent is computed just on the amount used and not on the whole sanctioned loan limit. The loan EMI is the interest calculated on the used amount. Interest would be applicable in the case the principal component stays unpaid. The principal amount payment can be performed at the will of the borrower and if the interest constituent is getting paid.
Also Check: Moneyview
Just imagine, you received a sanctioned loan limit equaling Rs 2 lakh for a span of 12 months, you withdrew a sum of Rs 1 lakh on the sixth month and before the 8th month you repaid the borrowed money i.e., Rs 1 lakh. The EMI would be calculated just on the interest constituent applicable on the borrowed amount i.e., Rs 1 lakh. The line of credit equaling Rs 2 lakh stays sanctioned for the rest of the period. Before the term of one year comes to an end, you require repaying the interest and principal constituent.
Drop–line overdraft –
Unlike the straight-line overdraft option, this financial option is usually opted for a longer repayment tenure and for a high credit value. In this case, the user gets the same flexibility of using the amount from the preapproved line of credit, however, the difference is based on the credit limit where the line of credit available continues dropping after every tenure. In the course of the tenure period, the interest constituent is computed just on the amount withdrawn and the EMI constituent consists of both interest and principal components.
For instance, considering the same instance, for a loan sanctioned limit equaling Rs 2 lakh for a time period of 12 months, the credit limit available will continue dropping post subsequent tenure accordingly and on the twelfth month, the limit available will equal zero. For the limit sanctioned equaling Rs 2 lakh for a span of 12 months, you can consider withdrawing Rs 1 lakh on the sixth month because the credit line continues dropping. You may repay whenever you want to, but the EMI constituent will consist of interest and principal components for the used period.
What are the different kinds of term loans available in the market?
Term loans can be classified depending on the loan repayment tenure. There are majorly three distinct kinds of term credit options, namely – long-term credit loans, mid-term credit loans and short-term credit loans.
Long–term credit option
Such credit options are unsecured in nature and are provided to you for a repayment tenure of over five years. Such loans have flexible repayment options, and the interest rate is lower.
Mid-term credit option
Midterm credit loans are provided by the borrowers for a repayment tenure of up to two to five years. The required documents for such credit options are comparatively minimal and simpler than required in the case of long-term credit options. The rate of interest is comparatively on the higher end than long-term credit loans.
Short-term credit option
Such credit options can be taken up for one to two years as suggested by the name. The funds may be used for meeting your daily expenditures and for achieving working capital needs. However, such credit options come with a higher interest rate than long-term and mid-term credit options.
