While a credit card is a well-known terminology among the masses, salary overdraft is one thing that is not known to the public at large.
Simply put, salary overdraft facilitates individuals to avail credit on their own salary accounts. It is offered only to select salary account holders and banks usually have their own eligibility criteria to determine this which includes checking the credit profiles of individuals.
The salaried individual is allowed to withdraw a certain amount over and above his/her salary.
According to Sagar Gogawat - product head, CashBean (PC Financial Services Pvt Ltd), the majority of the salaried individuals can get salary loans easily by going through a quick in-app process of short term loan. It is directly credited to the bank account and is hence easily encashable.
While some consider salary overdraft as one of the most convenient methods to raise funds for emergency purposes, Nitin Mathur, CEO of Tavaga Advisory Services suggests individuals do proper due diligence before availing it.
Comparing it to credit cards, he calls it relatively expensive.
"The three primary aspects involving the overdraft due diligence include the overdraft limit, the interest rate, and the fees/charges related to the credit. The interest rate on salary overdraft varies from 12 to 30 percent per annum (1 to 2.5 percent per month). With credit cards, along with the offers and benefits that can be redeemed post its usage, the user can repay the amount without any interest being levied," he warns.
Hence, unless and until the salaried individual is in need of cash in hand, Mathur stresses that credit cards should be preferred over salary overdraft during fund shortage.
Anil Pinapala, Founder & CEO of Vivifi India Finance Private Limited also calls credit card the best option as long as the individual has no stress on cash flows in the subsequent months.
However, Pinapala adds that only 5 percent of Indians have a credit card, so for the rest, a salary advance or salary overdraft is the best option as it saves them time and also saves them from the embarrassment of seeking funds elsewhere.
Moreover, Gaurav Chopra, founder and CEO of IndiaLends suggests borrowers to apply for a personal loan through a digital platform instead of both these options, which ranges between 10.5 - 20 percent interest rate.
"Unless there is an urgent need for cash, we strongly suggest refraining from taking a credit against a credit card as it involves about 40-45 percent interest rate on annual basis," he states.
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(Edited by : Jomy Jos Pullokaran)
First Published: IST