Both of these facilities are used to manage clients’ cash flows. They are both great products to have in place BEFORE unexpected expenses occur.
The understanding of how these products work can bring great value to you as it allows you to access cheaper financing products than say a credit card. The difference in interest rates for a credit card verses a PLOC or overdraft can be almost twice as much in some instances.
PLOC Facility
First we define the abbreviation by stating that PLOC stands for a Personal Line of Credit. A personal line of credit can help you cover unexpected expenses, emergency repairs or temporarily fill cash flow gaps. It’s a debt product that gives you access to a pool of funds that you can borrow any time you need cash. It can be a viable option to help manage your daily cash flow, especially if you have an irregular income or are faced with an unexpected expense.
PLOCs generally have lower interest rates than credit cards, so they’re typically cheaper for big cash advances. A PLOC can be issued either secured or unsecured which directly impacts the interest rate. A secured PLOC should be priced lower than an unsecured one.
Typically a PLOC is repaid within one year with interest expense demanded monthly on the account. Please note this can vary based on the Bank providing the product. Banks also have the right to update their expected repayment terms and conditions so make sure that you speak with your banker to determine expected repayment terms on this product.
Key Takeaways
- A personal line of credit is ideal for larger projects or long-term expenses.
- While they operate similarly to a credit card, personal lines of credit typically have much lower interest rates as stated above.
- You can take out a line of credit for business purchases or for personal use.
Overdraft Facility
An overdraft facility is tied to a specific bank account and can be used to cover unexpected expenses much like a PLOC.
Banks typically expects that an overdrawn position on your account is repaid monthly. Unlike the PLOC facility it is not ideal for purchasing anything that cannot be typically repaid by your monthly income deposits.
Key Takeaways
- An overdraft occurs when an account lacks the funds to cover a withdrawal, but the bank allows the transaction to go through anyway. When this is an authorized overdrawn position it means that the account has an overdraft facility attached that allows the account to utilize the overdraft limit. At no time must you allow your bank account to go into an unauthorized overdrawn position as this can negatively impact your credit score.
- The overdraft allows the customer to continue paying bills even when there is insufficient money in their account.
- An overdraft is like any other loan: The account holder pays interest on the amount in overdrawn.
- Once again this product is much cheaper than a credit card. You can either have a secured or unsecured overdraft facility. The unsecured overdraft is priced higher than a secured one.
- You can take out an overdraft facility for business purchases or for personal use.
Based on the above the main difference between the PLOC and the Overdraft facility is the length of time you have to repay these facilities. A PLOC typically has up to 12 months to be repaid whereas an overdraft facility should be repaid each month. A PLOC is for more “long term repayment” while an overdraft facility covers short term cash requirements.
Once again I remind you – the above can vary based on the Bank providing the product. Banks also have the right to update their expected repayment terms and conditions so make sure that you speak with your banker to determine expected repayment terms on this product.
Let me know if you found this article interested. If any of these facilities will prove useful for your cash flow management needs please do not hesitate to reach out to me.
If you have any questions please do not hesitate to contact us at support@afbconsultingservices.com