Salary Overdraft vs Personal Loan vs Line of Credit: Which Should You Choose?

Three ways to borrow against your salary, three very different cost structures. Here's how to pick the right one for your actual need.

💳 Interest only on amount used | 📊 Rates from 10% to 19% p.a. | ⏱️ 7 min read

If you're salaried and need quick funds, you've probably come across three options: an overdraft (OD) against your salary account, a personal loan, and a digital "line of credit" from an NBFC. They sound similar — all let you borrow against your income — but the cost difference for the same need can be dramatic depending on how long you actually hold the money. Here's how to choose correctly.

What Each Option Actually Is

Salary Overdraft (OD): A revolving credit limit linked to your salary account, typically 90% of one month's salary (capped around ₹1 lakh) at public sector banks, or up to 2-3 times your salary at some private banks. You withdraw as needed and interest is charged daily only on the amount outstanding.

Personal Loan: A lump sum disbursed upfront, repaid through fixed EMIs over a set tenure (typically 12-72 months). The interest is calculated on the full principal on a reducing balance basis, whether or not you need the entire amount immediately.

NBFC Line of Credit: A digital, revolving credit facility offered by NBFCs — functionally similar to an overdraft, but not tied to a specific bank account. You can draw, repay, and redraw within a sanctioned limit, paying interest only on what's utilised.

Interest Rate Ranges: How They Compare

On paper, an overdraft's headline rate often looks higher than a personal loan's. But that comparison only holds if you draw the full limit and hold it for a year — which is rarely how people actually use an overdraft or line of credit.

The Real Test: How Long Do You Actually Need the Money?

The headline interest rate is misleading on its own. What matters is total interest paid for your specific borrowing pattern. Here's an illustrative example for a short, one-time need:

For a genuinely short-term need — funds required for just a couple of weeks — an overdraft or line of credit can cost a fraction of what a personal loan would, simply because you're not paying interest on money you don't need for the full tenure. The equation flips for larger, longer-term needs, where a personal loan's lower headline rate and fixed EMI structure usually wins.

Side-by-Side: Salary Overdraft vs Personal Loan vs Line of Credit

Which One Should You Actually Pick?

• Recurring, short cash-flow gaps (a few days to a few weeks): A salary overdraft or NBFC line of credit — you'll only pay interest for the days you're actually short on cash.
• A large, one-time expense (wedding, medical, big purchase) you'll repay over months: A personal loan — the fixed EMI and lower headline rate work in your favour over a longer holding period.
• You want flexibility without being tied to your salary bank: A line of credit — no need to visit a branch or maintain a specific salary account relationship, and you draw only what you need, when you need it.
• You're trying to actively build your credit score: A personal loan, since it reports fixed EMI history to CIBIL every month — a salary overdraft or line of credit does far less for your score even when used responsibly.

The habit to watch: Overdrafts and lines of credit are convenient precisely because there's no fixed repayment date — which is also what makes them easy to let revolve indefinitely. Financial planners consistently flag this as the biggest risk with OD-style credit: treat it as a bridge for genuine short-term gaps, not a permanent top-up to your monthly budget.

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Frequently Asked Questions

1. Is a salary overdraft cheaper than a personal loan?

It depends on how long you hold the money. A salary overdraft usually has a higher headline interest rate than a personal loan, but since interest is charged only on the amount drawn and only for the days it's outstanding, it can work out far cheaper for short-term needs of a few days to a few weeks.

2. What is the difference between a line of credit and a personal loan?

A line of credit is a revolving facility — you draw, repay, and redraw within a limit, paying interest only on what's used. A personal loan disburses a fixed lump sum upfront with a fixed EMI over a set tenure, and you pay interest on the full amount regardless of whether you need it all immediately.

3. What does OD against salary mean?

An overdraft (OD) against salary is a revolving credit facility linked to your salary account that lets you withdraw more than your account balance, up to a pre-approved limit — typically a multiple of your monthly salary — with interest charged daily on the amount utilised.

4. Does a salary overdraft affect my CIBIL score?

A salary overdraft typically has a smaller impact on your CIBIL score than a personal loan, since it doesn't generate the same fixed monthly EMI repayment history that credit bureaus weigh heavily. If you're actively trying to build your credit score, a personal loan repaid consistently on time is more effective.

5. Can I get a line of credit without a salary account with the lender?

Yes — unlike a traditional bank overdraft, an NBFC line of credit typically doesn't require you to hold a salary account with that specific lender. Eligibility is usually based on your income, employment, and credit profile instead.

Continue Reading on AFI

• Beyond Credit Scores: How NBFC Tech Is Changing Lending
• Which One Is Best: Flexi Loan or Personal Loan?
• Private Financer in Delhi NCR for Personal Loan
• How to Apply for an Online Loan
• Instant Loan Online Platform in India
• Unsecured Personal Loan for Salaried — AFI

External References

• Business Standard — Overdraft Against Salary: Cost Comparison
• RBI — Guidelines on Current Account and Overdraft Facilities

This article is for informational purposes only and does not constitute financial advice. AFI (Ayaan Finserve India Pvt. Ltd.) is an RBI-registered NBFC (Reg. No. B-14.01220). Interest rate ranges and cost illustrations are indicative, based on publicly reported industry figures as of early 2026, and will vary by lender, credit profile, and loan terms.