What's the difference between a term loan and an overdraft, explained simply?

A term loan gives you a fixed lump sum upfront, which you repay in equal instalments (EMIs) over a set period. An overdraft is a flexible credit line attached to your account — you draw only what you need, when you need it, and pay interest only on the amount actually used. That's the core difference. Everything else about these two products follows from it.

How a term loan works

You apply for a specific amount — say, a business loan of ₹10 lakh for a new machine, or a car loan — and the bank sanctions it for a fixed tenure, typically 1 to 15 years depending on the purpose. The entire amount is disbursed at once (or in tranches for large project loans), and you start repaying through EMIs that cover both principal and interest. The interest rate is usually fixed at a lower level than an overdraft because the bank knows exactly how much is outstanding and for how long. Once you've repaid the loan, it's closed — there's no reusing the same sanctioned amount.

How an overdraft works

An overdraft (OD) is sanctioned as a limit on your current or cash credit account, not a lump sum. If your OD limit is ₹5 lakh, you can withdraw ₹1 lakh today and ₹3 lakh next week, and as long as you stay under the limit, there's no fresh approval needed each time. Interest is charged daily, only on the amount you've drawn — not on the full sanctioned limit. The moment you deposit money back into the account, your outstanding balance (and the interest you owe) drops immediately. This makes an OD ideal for managing short-term cash flow gaps — covering payroll before a client payment lands, for instance — rather than for funding something long-term like equipment or property.

Key differences at a glance

• Disbursement: Term loan is paid out in full upfront; overdraft is drawn as needed.
• Interest: Term loan interest applies to the full outstanding balance on a fixed schedule; OD interest applies only to the amount drawn, calculated daily.
• Repayment: Term loan has fixed EMIs over a set tenure; OD has no fixed EMI — you repay and redraw flexibly within the limit.
• Purpose: Term loans suit one-time, large purchases (asset, property, expansion); ODs suit recurring working-capital needs.
• Renewal: A term loan closes once repaid; an OD limit is typically renewed annually and can be used again and again.

Why banks offer both

Banks price and risk-assess these differently because the repayment behaviour is different. A term loan is a known, scheduled cash outflow for the borrower, which makes it easier for the bank to model risk over years. An overdraft is reviewed more frequently — usually annually — because usage patterns change and the bank wants to keep checking that the borrower's cash flow still supports the limit.

If you're studying for a bank PO, credit, or relationship officer role, this is one of the most commonly asked product-knowledge questions in interviews — examiners want to see that you understand the why, not just the definitions.

If you want to go beyond definitions and actually learn how banks structure, price, and sanction these products in practice — the kind of detail that comes up in real credit appraisal and retail banking interviews — AKROS Solution's retail banking program covers this hands-on, with case studies drawn from live banking products.