Overdraft vs personal loan: how do they compare?
Written by
Joe Towner
Reviewed by
Amy LancashireThe main difference between an overdraft and a personal loan comes down to flexibility versus structure. An overdraft is a flexible way to borrow small amounts for a short time through your current account, where you only pay interest on what you use. A personal loan gives you a fixed lump sum that you repay in set monthly instalments over an agreed term, usually at a lower interest rate. An overdraft can be useful to help with short-term cash-flow gaps, while a personal loan suits larger, planned borrowing you'll repay over months or years.
What is an overdraft?
An overdraft lets you keep spending through your current account after your balance reaches zero, up to a limit agreed with your bank. It's a form of revolving credit: you borrow what you need, and any money paid into your account automatically reduces what you owe. There are two types. An arranged overdraft is a limit your bank agrees to in advance. An unarranged overdraft is when you go beyond that limit, or overdraw without an agreed facility. Since the FCA's 2020 overdraft rules, banks must charge a simple annual interest rate with no separate daily or monthly fees, and they can't charge more for an unarranged overdraft than an arranged one.
Overdraft rates vary but some major banks charge around 39.9% EAR. EAR (Equivalent Annual Rate) is the measure used for overdrafts, in the same way APR is used for loans.
What is a personal loan?
A personal loan is a fixed amount of money you borrow and repay in equal monthly instalments over a set term, typically one to seven years. The interest rate is usually fixed, so your repayments stay the same and you know from the start exactly what you'll pay and when the loan ends.
Most personal loans are unsecured, meaning they aren't tied to an asset like your home or car. If you’d like to know more, our guide on what an unsecured loan is explains it. Rates are generally lower than overdrafts: the average rate on a new personal loan in the UK was 9.09% in March 2026, according to the Bank of England, though the rate you're offered depends on the amount and your credit history.
Overdraft vs personal loan: the key differences
| Overdraft | Personal loan |
|---|---|---|
How you borrow | Flexible, up to an agreed limit | Fixed lump sum upfront |
Repayment | No fixed schedule; repays as you pay in | Fixed monthly instalments |
Interest rate | Variable, usually higher | Usually fixed and lower |
You pay interest on | Only what you use, for the days you use it | The full amount over the whole term |
Best for | Short-term gaps and small amounts | Larger, planned borrowing over time |
Which works out cheaper?
It depends on how much you borrow and for how long.
An overdraft has a higher rate, but you only pay interest on what you actually use and only for the days you're overdrawn. So for a small amount over a few days or weeks, it can be cheaper.
The problem is using an overdraft for larger amounts or longer periods.
A personal loan of the same amount at a much lower rate, repaid over a set term, would usually cost far less overall, and the fixed repayments make budgeting easier.
It's worth understanding the difference between APR and interest rate when you compare the two, and you can work out your monthly repayments on a loan before you apply.
Which should I choose?
The right choice depends on what you're borrowing for.
An overdraft can make sense for short-term cash-flow gaps, small unexpected costs, or bridging a few days until payday, as long as you can clear it quickly.
A personal loan makes sense for a larger, planned expense like a car or home improvements, or for using a loan for debt consolidation, where you want predictable repayments over a set period.
If you're regularly relying on an overdraft each month, it might be a sign to consider a cheaper form of credit, or to reassess your budget to see why you’re going overdrawn.
FAQs
There are a range of financial products available that may suit your needs. We encourage you to research your options carefully and consider seeking independent financial advice before making any decisions. This blog is for informational purposes only and does not constitute financial advice.
