
Get exclusive money-saving offers and guides
Straight to your inbox
Updated
We’re reader-supported and may be paid when you visit links to partner sites. We don’t compare all products in the market, but we’re working on it!
Personal lines of credit and overdrafts are both flexible and convenient financing alternatives to standard personal loans and credit cards. However, they share many similarities and are often thought to be the same product.
In this guide below, we'll explain what they are and how they differ so you can choose the option that is right for you.
A line of credit is a personal loan that gives you access to a specified credit limit. It allows you to withdraw up to and including that limit.
An overdraft account is a special line of credit that's attached to your existing transaction account. You have access to a certain amount of credit that becomes available when you exhaust all the funds in your transaction account.
Line of credit | Overdraft | |
---|---|---|
Costs | Interest rates vary, but you will only pay interest on your balance, not your credit limit. Establishment fees may apply. | Overdrafts are unsecured, so variable rates generally apply. You will only pay interest on your outstanding balance, but you can expect monthly or annual fees on the account. An establishment fee may also apply. |
Loan term | You generally have a choice between an ongoing line of credit, where you can keep the account open as long as it’s in good standing, or one with a fixed term, generally between one and five years. | An overdraft account does not usually have fixed repayment terms. Your account will be ongoing as long as you keep making regular repayments. |
Availability & access | Eligibility criteria will vary, but lines of credit are generally available to those with good credit who can afford the repayments. Lenders generally provide a debit card that you can use to access your line of credit. | You will need to be an existing account holder or looking to open a transaction account with the bank to open an overdraft. You can then access your overdraft automatically when your transaction account funds have been exhausted. |
If you’re wondering which of the two accounts will best meet your needs, you can ask yourself the following questions:
How and when will I need access to the funds?
A line of credit will give you access to funds when you need it, but an overdraft can only be accessed when your own funds have been used up. This is an important point to keep in mind.
Do I need an "emergency" account?
Overdrafts are typically thought of as “safety net” accounts. You'll only be charged interest on your overdraft account balance and will not be charged overdraft fees even if your account goes into the negative.
variable rate
100% confidential application
Citibank Ready Credit Loan offers a low-rate, flexible personal loan that caters to the needs of simplifying debt.
Picture: Shutterstock
Find out what you need to know before starting an accounting business.
Do you have to tell your lender if you rent out a room and turn your mortgage into an investment loan?
Can't decide between TPG and iiNet? We've compared the two over a range of categories to find out which provider is better.
The Citibank Ready Credit unsecured revolving line of credit is available with a 3-year introductory rate of 5.9% p.a. on balance transfers.
This is the final week of our 4-week financial fitness challenge, where we help you understand your savings, super and investments.
How to cut debt and make your credit card work for you.
The online retailer is expected to raise $40 million as it launches onto the ASX. Here's what you need to know.
Everything you need to know about Australia's biggest IPO of 2020.
SPONSORED: A reverse mortgage could let you use some of your home equity to fund your retirement costs. Here's what you need to know.
This card gives you a way to support a program that matches rescue dogs with veterans in need and enjoy a low interest rate on all your spending.