Overdraft vs loan cost calculator

What this calculator does

An overdraft and a term loan solve overlapping problems in very different ways, and the cheaper one depends entirely on how you'll use the money. This calculator compares the two directly. You enter the amount you need, the overdraft's rate and any fee, and the loan's rate and term, and it returns the cost of each plus a clear verdict on which works out cheaper for your situation.

The key distinction it captures: an overdraft charges interest only on what you actually use, day by day, while a term loan charges interest on the full balance across a fixed term. For a constant, known borrowing need a loan usually wins; for a small or occasional swing you dip into briefly, an overdraft often does. This tool does the arithmetic so you don't have to guess.

How to use it

Gather both offers and enter:

1. Amount needed — the sum you want to cover.
2. Overdraft rate — the annual rate, plus any arrangement or annual facility fee, which on overdrafts can be a significant part of the cost.
3. Loan rate and term — the annual rate and the number of months you'd repay over.

For a fair comparison, think about how long and how continuously you'd actually need the money. An overdraft used at its full limit all year behaves much like a loan; one tapped for a few days a month costs far less. The calculator assumes the amount you enter to compare like for like, so adjust your expectations to match real usage.

How to read the result

You get a cost figure for each option and a flag on the cheaper one. But read it with your usage pattern in mind, because that's what tips the balance.

A loan tends to win when the need is large, constant and known — a fixed sum for a fixed purpose over a fixed time. The rate is usually lower than an overdraft's, repayments are predictable, and you're not exposed to the facility being reduced at the bank's discretion. An overdraft tends to win when the need is small, short or unpredictable — because you pay interest only on what you draw and only while you draw it. The trap is paying overdraft rates and fees on a balance you keep fully drawn for months; at that point a loan or a revolving credit facility is almost always cheaper and more stable.

The formula in plain English

Each side is costed on its own terms:

Overdraft cost ≈ (amount used × rate × time used) + facility fees

Loan cost ≈ total interest over the term + any arrangement fee

The decisive variable is time used. An overdraft's interest accrues only on the daily drawn balance, so borrowing £10,000 for ten days costs a fraction of borrowing it for a year. A loan, by contrast, charges across the whole term whether or not you'd have cleared the need sooner. So the comparison isn't really "which rate is lower" — overdraft rates are usually higher — it's "which structure matches how I'll actually use the money".

Worked example

A business needs £10,000. The overdraft is 14% a year plus a £150 annual fee; the loan is 12% over 12 months.

If the £10,000 is needed all year, the overdraft costs roughly £1,400 interest + £150 fee = £1,550, while the loan costs around £660 in interest on a reducing balance — the loan wins clearly. But if the business only dips £10,000 for two weeks a month, the overdraft interest falls to a few hundred pounds plus the fee, and now the overdraft is far cheaper than a year-long loan it doesn't need. Same numbers, opposite answer — usage decides. Figures are illustrative.

Limitations to keep in mind

The honest answer depends on a usage pattern the calculator can only assume. Model your realistic drawdown, not the worst case, and remember overdrafts are typically repayable on demand — the bank can reduce or withdraw the limit, which a committed loan or facility won't do. That stability has a value the pure cost comparison doesn't show.

For a recurring or unpredictable need that doesn't fit either box neatly, a revolving facility blends the best of both — draw and repay flexibly like an overdraft, but committed like a loan. Compare the all-in cost properly with the true cost of borrowing calculator, and size the underlying need with the working capital calculator. This is general information, not financial advice.