Both businesses and individuals often require credit. And this need has traditionally been fulfilled by banks (and their overdraft facilities) and large, established institutions. But thanks to advancements in several areas – technology, a rising startup ecosystem, and even market demand, short-term credit via loan apps have gained much popularity in addition to traditional methods such as bank overdrafts. With multiple credit options available, the answer to which one is the best amongst them would simply depend upon the requirements and preferences of the customer.
A bank overdraft is essentially a credit extension from a financial institution that enables account holders to withdraw money even when the funds available in the bank account are insufficient or at zero balance. It typically works like a loan.
On the other hand, loan apps, such as Fibe (formerly EarlySalary), provide instant credit to customers via an online application process.
Here’s a closer look at the finer differences between the two.
A bank overdraft facility can be availed by account holders who meet certain eligibility criteria that are determined by the bank, such as creditworthiness and the type of collateral. Overdrafts can be available against fixed deposits, salary, shares, bonds, property, or traditional insurance policies.
However, there are many customers whose credit scores may be insufficient to guarantee them access to bank overdrafts or other traditional credit options. This is where the digital credit ecosystem, with its features such as loan apps, has been making its footprint. Loan apps such as Fibe offer easy access to instant credit for salaried employees. Therefore, credit via loan apps can be availed by a wider range of people as compared to a bank overdraft.
For bank overdrafts, the withdrawal limits are set by the lending institution based on the creditworthiness of the account holder. This may vary from person to person. Loan apps too can have different withdrawal limits. Fibe, for instance, allows customers a flexible loan amount starting from Rs. 8,000 up to a limit of Rs. 5,00,000. Therefore, while the withdrawal limits can often vary, bank overdrafts can generally offer greater limits if the eligibility criteria are satisfied.
Bank overdrafts seem to have a certain advantage when it comes to charges. There are no pre-closure charges and the customers are required to pay interest charges for the time and amount that they use.
However, there is a demerit to this – if the customer crosses an agreed limit, then they could risk high costs. Moreover, defaults would spoil the customer’s credit score. In this regard, loan apps can often have interest rates or fees that are a bit on the higher side. Fibe, however, does not have any prepayment charges and offers attractive interest rates.
Being a traditional finance method, the application and approval process for getting a bank overdraft may be slightly longer as compared to loan apps which have a very short, online application process that requires minimal documentation. At Fibe, you can get an instant loan in 10 minutes.
It is evident that the right option for availing of credit would be the one that better suits your needs. Someone with a stable salaried job and a good credit score may prefer a bank overdraft while someone who does not have a good credit score would have to go for loan apps. Moreover, if you need instant credit without hassles, loan apps offer an easier online application process with quick approval.
One could say that the loan app is largely targeted at salaried millennials who may be looking for salary advances as alternatives to bank loans. All the same, it is always imperative to do one’s research and evaluate one’s needs while seeking credit. If you are clear about your requirements, the choice between loan apps and bank overdraft can be quite obvious.
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