In today’s fast-paced financial world, liquidity and access to quick funds are crucial—both for individuals and businesses. Two common credit tools offered by banks and financial institutions are lines of credit (LOCs) and overdrafts. While both options offer flexibility in accessing funds, they differ significantly in structure, interest rates, repayment terms, and suitability.
In this comprehensive guide, we’ll break down the key differences between a line of credit and an overdraft, including their definitions, types, advantages, disadvantages, and best use cases.
📌 What is a Line of Credit?
A Line of Credit (LOC) is a flexible loan from a bank or financial institution that allows borrowers to access funds up to a pre-approved limit. You can withdraw money as needed, repay it, and borrow again, similar to a credit card.
✅ Key Features of Line of Credit:
- Borrow up to a fixed credit limit
- Interest charged only on the amount used
- Revolving credit: repay and reuse
- Flexible repayment options
- Often requires credit assessment
🏦 Types of Lines of Credit:
| Type | Description |
|---|---|
| Personal Line of Credit | For individual financial needs like education, travel, or emergencies |
| Home Equity Line of Credit (HELOC) | Secured against home value, often used for renovations |
| Business Line of Credit | Used for business expenses and working capital |
| Secured Line of Credit | Backed by collateral like FD, property, or assets |
| Unsecured Line of Credit | No collateral required, but comes with higher interest |
📌 What is an Overdraft?
An Overdraft is a facility that allows you to withdraw more money than you currently have in your bank account, up to an agreed limit. It’s essentially a short-term credit line linked directly to your current or savings account.
✅ Key Features of Overdraft:
- Linked to a bank account
- Temporary negative balance allowed
- Interest charged on overdrawn amount
- Overdraft limit pre-set by the bank
- Easy and quick access to funds
🏦 Types of Overdraft Facilities:
| Type | Description |
|---|---|
| Secured Overdraft | Backed by collateral (like FDs or property) |
| Unsecured Overdraft | Offered without collateral, usually at higher interest rates |
| Salary Overdraft | Offered to salaried individuals with a salary account at the bank |
| Business Overdraft | Given to business accounts to manage working capital needs |
🔍 Line of Credit vs Overdraft: Detailed Comparison Table
| Feature | Line of Credit | Overdraft Facility |
|---|---|---|
| Purpose | Ongoing cash needs, planned or unplanned | Short-term emergencies or temporary shortfall |
| Account Type | Separate credit account | Linked to current/savings account |
| Credit Limit | High (₹50,000 to ₹50 lakh or more) | Usually lower (₹5,000 to ₹5 lakh) |
| Interest Rate | 10% to 18% (varies based on creditworthiness) | 9% to 20% (depends on the bank/product) |
| Usage Flexibility | Withdraw, repay, reuse multiple times | Withdraw only when balance goes negative |
| Security Required | Optional (secured/unsecured) | May be secured or unsecured |
| Repayment Structure | Monthly EMIs or lump sum | Paid back when funds are deposited |
| Best For | Businesses, high-credit consumers | Individuals, emergency needs |
| Approval Time | Moderate to High | Quick and instant (if pre-approved) |
🧠 When Should You Choose a Line of Credit?
A line of credit is ideal when:
- You need frequent access to funds for personal or business use.
- You’re managing cash flows, like supplier payments or large projects.
- You want a revolving credit mechanism with flexible repayment.
- You plan to borrow larger sums for planned expenses.
🔄 Example Scenario:
Rohit runs a marketing agency. He uses a business line of credit of ₹15 lakh to manage project expenses. When clients delay payments, Rohit withdraws funds from the LOC, repays once paid, and repeats the process.
💡 When is an Overdraft Better?
An overdraft is more suitable when:
- You face occasional shortfalls in your bank account.
- You require emergency funds quickly.
- You want easy access without paperwork.
- You need a small, short-term borrowing solution.
💼 Example Scenario:
Meera is a salaried employee. One month, she forgets about an EMI debit and has only ₹3,000 in her account. The EMI is ₹5,000. Her salary overdraft covers the shortfall automatically, avoiding a bounced EMI penalty.
💬 Pros and Cons of Line of Credit
✅ Pros:
- Flexible borrowing and repayment
- Interest only on used amount
- Higher limits than credit cards
- Can be used repeatedly
❌ Cons:
- May require good credit history
- Charges for unused credit line (in some cases)
- Higher interest for unsecured options
💬 Pros and Cons of Overdraft
✅ Pros:
- Instant access to emergency funds
- No need to apply every time
- Auto-debit from the same account
- Useful for bounced cheque or EMI protection
❌ Cons:
- Limited borrowing amount
- High interest if used often
- Short repayment period
- Charges can accumulate if not tracked
🧾 Documentation & Eligibility
| Criteria | Line of Credit | Overdraft Facility |
|---|---|---|
| Eligibility | Credit score, income, business turnover | Salary credit or account history |
| Documents Needed | PAN, Aadhaar, income proof, ITR, bank statement | KYC, salary slips or FD proof |
| Processing Time | 2 to 7 working days | Often instant (for pre-approved customers) |
📈 Which One Has Better Interest Terms?
- Line of Credit: Usually better if you maintain good credit. Some banks offer as low as 10% p.a. for secured LOCs.
- Overdraft: Convenient but expensive if used frequently. May go as high as 20–24% p.a. for unsecured overdrafts.
🔢 Interest Cost Example:
| Criteria | Line of Credit | Overdraft Facility |
|---|---|---|
| Amount Used | ₹1,00,000 | ₹1,00,000 |
| Duration | 30 days | 30 days |
| Interest Rate | 12% p.a. | 18% p.a. |
| Interest Payable | ₹1,000 | ₹1,500 |
📚 Real-Life Use Cases
🏢 Businesses:
- Line of Credit: Ideal for managing receivables, stocking inventory, paying vendors
- Overdraft: Handy for cheque clearing delays or sudden expense dips
👤 Individuals:
- Line of Credit: Can be used for education loans, wedding planning, or big-ticket purchases
- Overdraft: Ideal for last-minute bill payments, ATM withdrawals when the balance is low
🛠️ Digital Options in India
Several banks and fintechs now offer online applications for both facilities. Some popular providers:
| Provider | Line of Credit | Overdraft |
|---|---|---|
| HDFC Bank | ✅ | ✅ |
| ICICI Bank | ✅ | ✅ |
| SBI | ✅ | ✅ |
| Paytm/PostPe | ✅ | ❌ |
| Axis Bank | ✅ | ✅ |
| KreditBee/Indiabulls | ✅ (personal) | ❌ |
📝 Final Thoughts: Line of Credit vs Overdraft – Which Should You Choose?
Both a line of credit and an overdraft offer unique advantages. Your choice should depend on:
- How often you need credit
- The amount you need
- How soon you can repay
- Your credit profile
🔍 Choose Line of Credit If:
- You want higher flexibility
- You borrow regularly
- You prefer structured repayment
🔍 Choose Overdraft If:
- You face temporary account shortfalls
- You need funds urgently
- You want minimal documentation
📎 Frequently Asked Questions (FAQs)
❓Can I have both a line of credit and an overdraft?
Yes, many individuals and businesses use both based on their needs.
❓Does an overdraft affect my credit score?
It can, especially if unpaid or frequently overdrawn beyond the limit.
❓Is a line of credit better than a personal loan?
Yes, in terms of flexibility. You pay interest only on the amount used, unlike a lump-sum loan.
📌 Conclusion
Understanding the difference between a line of credit and an overdraft can help you make smarter financial decisions. Whether you’re running a business or managing personal finances, having access to the right form of credit can ensure stability, emergency preparedness, and financial freedom.
Use these tools wisely, compare offerings from various providers, and always read the terms and conditions carefully to avoid hidden charges and financial stress.