Line of credit or overdraft? We break down the features so you get the product that’s right for you.
Personal overdrafts and lines of credit are both flexible and convenient financing alternatives to standard personal loans and credit cards. However, they are often thought to be the same product, and the similarities between the two often make it difficult to choose. In the guide below, both accounts will be broken down so you can pick the right one for your needs.
What are lines of credit and overdrafts?
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 is also a line of credit, but it’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 account.
What are the main differences?
|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.||These accounts do not usually have fixed repayment terms. Your account will be ongoing as long as you keep making regular repayments.|
|Availability and access||Lenders generally provide a debit card that gives you access to your line of credit. Eligibility criteria vary, but they are generally available to those with good credit who can afford the repayments.||You will need to be an existing account holder or looking to open a transaction account with the bank to open an overdraft. Then, you can access your overdraft automatically when your account funds have been exhausted.|
Which account is right for you?
If you’re wondering which of the two accounts will best meet your needs, ask yourself the following questions:
- How often 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. Even if your account goes into the negative, you will not be charged overdraft fees, you’ll only be charged interest on your overdraft account balance.
Understanding the differences between these two accounts will help you decide which product is right for you.
Compare the differences between the two