This product, also known as the overdraft limit, credit line, or popularly “overdraft” is the option of obtaining a loan from a bank account that we have. As part of this product, after the application for granting it, the bank performs a standard creditworthiness analysis. If our application is approved within the bank account, we can reduce its balance within the available limit. If we use our own funds that we have in our account and start using the limit, the bank will charge us interest for this fact. The limit is repaid with each subsequent inflow to the account. Once in a year, we must additionally reckon with the fee for renewing the limit for the next year, which usually represents a few percent of the limit granted.
Revolving loan and cash loan
The cash loan is repaid in annuity installments, i.e. in principal and interest installments. In a revolving loan I am obliged to pay interest on the capital I use at a given moment. The capital is repaid with any inflow to the account, but I can always use the money up to the limit.
Similarities and differences in products
Both the cash loan and the overdraft limit are products dedicated to finance the current needs of individual clients. To get the product, customers are subject to the same assessment by the bank’s systems and verification in external databases. The differences may appear in the amounts of financing proposed by the bank taking into account the repayment characteristics of these products. Their repayment method is the most important difference: we repay the loan in specific monthly installments, while the limit can be repaid several times with each single inflow to the account, e.g. with a salary transfer or transfers from other accounts that we have. An important difference is also the obligation to have a personal account with which the assigned limit will be linked. While we can take a cash loan in any bank and pay it back using an existing personal account in another bank or less often in the form of cash via fee points, the limit is strictly associated with having an additional bank account.
Which one should you choose?
As the English say “it depends”. It all depends on the purpose of financing and our current credit needs. If we have a clearly defined goal in mind, e.g. buying a car, financing home furnishings or renovation, a cash loan with a clearly defined repayment schedule will be a good solution. However, if we are looking for collateral financed for unforeseen expenses – if our renovation needs were greater than the cash loan obtained – it is worth asking the bank where we already have a personal account about the option of obtaining a limit. Thanks to this, we will be able to finance more or less unforeseen expenses.