Overdraft or loan

Choosing between a bank overdraft and a loan

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If you’re looking to borrow, you might be considering an overdraft or a loan. We round up the pros and cons of both

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Overdraft

An agreed overdraft can be a useful tool if you want to borrow money over the short-term or in an emergency.

An overdraft allows you to borrow money through your bank's current account up to a certain limit. You may find your bank automatically offers you an overdraft, or you have to request this facility.

You will usually have to pay interest or fees on your overdraft. There are a few banks that offer interest or fee-free overdrafts, but these typically only apply up to a relatively low limit or for a set time.

Loan

A loan is an agreement whereby you borrow funds that you’ll have to repay with added interest. You typically repay the loan in monthly instalments.  

An unsecured or personal loan is not secured against an asset such as your home. Secured loans, on the other hand, will usually be secured against your property and need to be considered carefully.

Why choose a loan?

Many people choose to take out a loan for various reasons, but it’s not a decision to be taken lightly. It’s important to make sure you’ll be able to afford to repay the amount you borrow and have a plan in place to make your repayments on time.

Here are a few reasons why you might want to think about a loan:

  • You’ll usually be able to borrow more money than you could with an overdraft
  • If you’re borrowing over a longer period of time, taking out a loan will usually be cheaper than using an overdraft as the interest won’t be as high
  • The interest rates tend to be fixed which means you’ll know what you’ll be paying throughout the remainder of the loan term

What are the disadvantages to taking out a loan?

Before taking out a loan, it’s important to consider the drawbacks:

  • The interest on a personal loan can be high if you’re borrowing a small sum
  • Secured loans can allow you to borrow more than unsecured loans, but they are usually linked to high-value assets such as your property. This means if you are unable to keep up with your repayments on a secured loan, there is a risk you could lose your home
  • Loan repayments are usually less flexible – the criteria is set by the lender, so it’s worth talking to them if you think you won’t be able to make them in time
  • If you want to repay your loan early, there’s often an early repayment fee

Why choose an overdraft?

Depending on your financial needs, an overdraft could be a better option. Here are a few reasons why:

  • You’ll have flexible borrowing and repayment options, which gives you some freedom to decide how much money you repay each month
  • An overdraft tends to be the cheaper option for short-term borrowing, as you may be able to access one that doesn’t charge interest

Disadvantages of using an overdraft

There are a number of disadvantages when opting for an overdraft loan. Here are a few you might want to consider:

  • The amount of money you can access through your overdraft tends to be lower than with a personal loan
  • Fees and interest charged on overdrafts can be high – even more so if you go over your agreed limit – making it an expensive way to borrow

Types of loans and credit products owned

Surveyed 1,972 Surveyed internet users, data sourced from Mintel, accurate as of January 2019

How much can I borrow?

Overdrafts usually give you access to funds of up to £2,000 or so, but how much you can borrow will vary depending on both your credit score and your income.

Loans tend to offer £1,000 as a minimum and up to £25,000 depending on whether you meet the provider’s specific criteria.

Minimum amount of money needed for people to consider a personal loan

Surveyed 1,972 Surveyed internet users, data sourced from Mintel, accurate as of January 2019

Repayment deadlines

Short-term loans are typically repaid within one to three years, while long-term loans can usually be paid off in up to seven years. The deadlines can vary depending on the deal, provider and the amount of money you’ve borrowed.

Overdrafts meanwhile do not require a specific repayment date, but it’s best to try and clear your overdraft as soon as possible – particularly if you’re being charged interest. 

Should I pick an overdraft or a loan?

An overdraft could be a better choice if you’re looking to borrow a small amount of money over a short amount of time – this tends to be a good way to access emergency funds. But try to look for an overdraft that won’t charge interest or fees.

A personal loan on the other hand, will give you access to larger funds and plenty of time to repay the balance. But make sure you will be able to afford to pay off the loan in time.

It’s also worth considering other borrowing options such as a 0% credit card. If you are only looking to borrow a small amount – say £2,000 - you could consider using a 0% money transfer card which allows you to transfer money from your credit card into your current account and borrow interest-free for up to two years or more.

Just be aware you will have to pay a fee to transfer the funds and make sure you clear your balance before the interest-free deal ends.

Representative Example: If you spend £1,200 at a purchase interest rate of 19.95% p.a. (variable) your representative rate will be 19.9% APR (variable).

Compare loans

There are many different types of loans on offer - find out which is the right for you by comparing deals with the MoneySuperMarket comparison tool. You can shop around for the right deal and take advantage of offers by comparing perks, criteria, lenders and anything else you need to know before making a decision.

Simply tell us a little about your financial situation and what you want to use your loan for and we’ll provide you with a tailored list of deals. Once you’ve decided on what you want, click through to the deal where you’ll be taken to the provider page where you can get the process started.

All loans and credit cards are subject to status and terms and conditions. Over 18s, UK residents only. Terms and conditions apply. See MoneySuperMarket.com for further information.

MoneySuperMarket is a credit broker - this means we'll show you products offered by lenders. We never take a fee from customers for this broking service. Instead we are usually paid a commission by the lenders - though the size of that payment doesn't affect how we show products to customers.

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