Overdraft Against Your Salary Account or a Personal Loan: Which Costs Less

Two people borrow Rs.3 lakh from the same bank in the same month. One takes a personal loan at 14 percent and pays roughly Rs.1.02 lakh in interest over five years. The other takes a salary overdraft at 16 percent and pays under Rs.20,000, because they used the money for eleven weeks and repaid it. Having built both products from inside lending institutions, we can tell you the headline rate is almost never the right basis for choosing between them. Utilisation is.

What a salary overdraft actually is

A salary overdraft is a pre-approved credit limit attached to your salary account. You can draw down to that limit whenever you need, and interest is charged only on the amount actually used, calculated daily on the outstanding balance.

The limit is usually set as a multiple of your net monthly salary, commonly two to three times, subject to the bank’s own assessment. A net salary of Rs.60,000 typically supports a limit somewhere between Rs.1.2 lakh and Rs.1.8 lakh, though banks with a deeper relationship history sometimes go higher.

There is no fixed EMI. Any credit to the account, including your salary, automatically reduces the outstanding, and the balance revolves. You are generally required to service the interest monthly, and the limit is reviewed annually.

The critical mechanical difference from a personal loan is that repayment restores availability. Repay Rs.50,000 into the overdraft and that Rs.50,000 is available to draw again. Prepay Rs.50,000 into a personal loan and the money is gone from your access permanently.

When the overdraft is clearly better

Four situations, and they share a common feature: the need is uncertain in timing or amount.

Irregular or lumpy expenses. School fees in April, an insurance premium in September, a wedding contribution at short notice. You draw when needed and repay when the next inflow arrives, paying interest only for the days in between.

Bridging a known gap. A delayed reimbursement, a bonus arriving next quarter, a property sale in progress. You know the money is coming; you need it earlier. Interest for eight weeks on Rs.2 lakh at 16 percent is roughly Rs.4,900, which is a rational price for that bridge.

Business or freelance income with irregular timing. Where income arrives in uneven cycles, an overdraft absorbs the variance far better than a fixed EMI does.

As a standby rather than a borrowing. A sanctioned but undrawn overdraft costs you nothing beyond any annual maintenance charge, and it removes the need to borrow expensively in an emergency. This is arguably its best use, and the one fewest people employ it for.

When the personal loan is clearly better

Three situations, and they share the opposite feature: the need is defined and the repayment will take years.

A large one-time expense you will repay over years. Home renovation, a medical event, education fees. The amortising structure of a personal loan forces principal repayment, and the total interest on a five-year loan is far lower than on a revolving facility held at similar utilisation for the same period.

Debt consolidation. Replacing card balances at 40 percent with a personal loan at 14 percent works precisely because the loan structure closes out the debt on a schedule. Doing the same through an overdraft frequently just relocates the revolving balance. Our debt consolidation guide covers when the maths genuinely works.

Where you know your own discipline is the constraint. This deserves saying plainly because it is the real decision for many borrowers. An overdraft has no forced repayment, which means a balance can sit at 90 percent utilisation for three years while you pay interest and nothing else. The personal loan’s rigidity is its main protective feature.

The costs that are not the interest rate

Four items to check before choosing, because they change the comparison materially.

Overdraft renewal and maintenance charges. Many salary overdrafts carry an annual fee or a renewal charge whether or not you use the facility, typically Rs.500 to Rs.2,000 plus GST. On a facility used twice a year, this is a real component of cost.

Personal loan processing fees. Commonly 1 to 2.5 percent of the loan amount, charged upfront and often deducted from the disbursal. On a Rs.3 lakh loan, 2 percent is Rs.6,000 plus GST, and it is incurred whether you keep the loan for five years or five months.

Foreclosure and part-payment terms. Personal loans frequently restrict prepayment for an initial period and may charge on foreclosure, though floating rate loans to individuals for non-business purposes have protections in this area. Ask specifically rather than assuming.

Interest calculation basis on the overdraft. Daily balance calculation is standard and favourable. Confirm it, because a monthly average balance basis produces a different and usually worse outcome for someone repaying mid-month.

Whichever you choose, confirm the disbursal amount matches the sanctioned amount, and that nothing has been added. Our guide on the 2026 bundling rules covers what you are entitled to refuse.

How to get one, and what the bank checks

Eligibility for a salary overdraft is generally assessed on the same data your bank already holds, which is what makes it fast.

Salary credit consistency matters most. Banks typically want six to twelve months of regular credits from an identifiable employer into the same account. A recent job change resets this clock at most banks even where income rose.

Your existing obligations are read from the account and from your bureau report, and the limit is sized against the headroom that remains. The same fixed obligation logic that governs personal loan eligibility applies here, described in our guide on what a salary of Rs.25,000 to Rs.50,000 supports.

Relationship depth influences the outcome more than it does on a personal loan. A salary account holder of four years with a fixed deposit and a card in good standing will be offered a higher multiple than a six-month-old account with identical income, because the bank has more observed behaviour to price against.

Ask at your own bank first, and ask specifically for a salary overdraft rather than a general overdraft, because the two are different products with different pricing. Many banks do not advertise the facility and it is frequently granted on request to customers who would have qualified all along.

The structure many people actually need

For a large number of salaried borrowers, the right answer is not one or the other but both, used for different purposes.

Keep a modest salary overdraft sanctioned and undrawn as your emergency facility. It costs almost nothing to hold and it removes the situation where an urgent Rs.80,000 need gets met by a lending app at 30 percent.

Use a personal loan for anything you know will take more than a year to repay, because the discipline of amortisation is worth more than the flexibility you give up.

The failure mode to avoid is using the overdraft for a long-term need. Interest on a revolving balance never ends until the principal is repaid, and a facility with no forced repayment schedule frequently does not get repaid.

The practical next step is to check whether your salary account already carries a pre-approved overdraft limit, since many do and account holders are unaware. If one exists and is undrawn, that is your emergency facility already in place, and knowing the limit and the rate today is worth far more than discovering them during an emergency.