Quick answer
A term loan is a lump sum repaid over a set term. A line of credit is a revolving limit you can draw on, repay and draw on again. An overdraft lets you go below zero on a transaction account up to an approved limit. Each suits a different need, from one-off purchases to smoothing cash flow.
Key points
- A term loan delivers a lump sum with a repayment schedule, which suits a one-off purchase or project.
- A line of credit is a reusable limit, which suits uneven cash flow or ongoing costs.
- An overdraft is tied to a transaction account and is designed for short-term dips, not long-term funding.
- Limits, security and review terms vary, and a facility can be reduced or reviewed by the lender.
What is the difference between a line of credit, an overdraft and a term loan?
A term loan gives you a lump sum that you repay over a fixed term. A line of credit gives you a reusable limit you can draw on, repay and draw on again. An overdraft lets a transaction account go below zero up to an agreed limit. All three are borrowing, but they behave differently in how the money arrives, how it is repaid and how long it is meant to last.
Ownright Custom Finance arranges all three for households and businesses Australia-wide, and director Trevor Scott has spent four decades matching the structure to the need. Here is how they compare in plain English.
How does a term loan work?
You borrow a set amount, receive it in one go or in stages, and repay it through scheduled repayments until the balance reaches zero. Business.gov.au lists term loans among the standard finance options, often with a fixed or variable interest rate and a fixed end date.
- Best for: one-off purchases, renovations, equipment, an acquisition or consolidating debts.
- Pros: predictable repayments, a clear end date, easy to budget.
- Cons: you pay interest on the full amount from the start, and once repaid you cannot reuse the funds without a new loan.
Related reading: short-term vs long-term business loans and small business loans.
How does a line of credit work?
A line of credit is a pre-approved limit. You draw what you need, pay interest on the drawn balance, and when you repay, the limit is available again. Some have minimum monthly repayments, some are interest-only, and some require the balance to be cleared periodically.
- Best for: unpredictable or recurring costs, bridging payment gaps, seasonal swings, or a buffer for opportunities.
- Pros: flexibility, interest only on what you use, reusable.
- Cons: the temptation to treat it as ongoing funding, the possibility of the limit being reviewed or reduced, and sometimes fees for keeping it open.
Product pages: business line of credit and personal line of credit. A line of credit secured over home equity is related to a home equity loan.
How does an overdraft work?
An overdraft is attached to a transaction account. When your balance would go below zero, the bank covers the shortfall up to an approved limit, and you pay interest on the overdrawn amount. For businesses, an overdraft is a classic tool for covering short-term gaps between paying suppliers and getting paid by customers.
- Best for: small, short-lived dips.
- Pros: automatic, convenient and linked to everyday banking.
- Cons: meant for short-term use, can be reviewed at any time, and an account that sits overdrawn for long stretches can signal to the lender that other funding is needed.
See business overdraft for the business version.
Side-by-side comparison
| Feature | Term loan | Line of credit | Overdraft |
|---|---|---|---|
| How funds arrive | Lump sum or staged | Draw as needed | Account goes negative |
| Reusable | No | Yes | Yes |
| Interest charged on | The balance owing | The drawn balance | The overdrawn amount |
| Repayment | Scheduled | Varies, can be interest-only or minimum | Cleared as money comes in |
| Term | Fixed | Often reviewed periodically | Often reviewed periodically |
| Typical use | One-off costs | Cash flow and flexibility | Short-term dips |
| Security | Secured or unsecured | Secured or unsecured | Secured or unsecured |
Pricing depends on your circumstances and the lender. No product is cheap or expensive in itself, and fees such as establishment, line fees and review fees can matter as much as the interest.
Which one suits which situation?
- Buying equipment, a vehicle or a property: a term loan, or specific asset finance such as equipment finance.
- Chasing slow-paying customers: an overdraft, line of credit or invoice finance.
- Seasonal business: a line of credit or seasonal business loan.
- Personal buffer for irregular expenses: a personal line of credit, understanding the risks.
- Funding that needs to be ready the moment you need it: a line of credit that is already approved.
This is general information, not personal advice. The right fit depends on your cash flow, goals and security.
What do lenders look at?
- Cash flow and income: how reliably the borrower can service interest and repay.
- Security: property, a general security agreement or other assets. See types of loan security explained and general security agreements and PPSR explained.
- Credit history: defaults, enquiries and conduct on existing accounts.
- Usage patterns: how often and how deeply an existing facility is used.
- Purpose: whether the funding matches the facility. Using a short-term overdraft for a long-term asset purchase is a classic mismatch.
If you are self-employed, how much can I borrow self employed explains how income is assessed.
What are the risks?
- Review risk. A lender can reduce or withdraw a revolving limit, sometimes when you most need it.
- Debt drift. Because balances can be re-used, they can rise unnoticed.
- Mismatched purpose. Funding long-term needs with a revolving limit can create a refinance problem.
- Security risk. If secured by property or business assets, those assets are exposed if repayments fail.
- Fees. Line, review and unused limit fees can add up.
Setting a personal rule, such as paying the balance down regularly or keeping it under a comfortable level, can help. MoneySmart has free tools for budgeting and understanding borrowing.
How does Ownright approach it?
We begin with what the money is actually for and when it needs to come back. A business waiting on invoices might be better served by a line of credit or cash flow loan. A one-off equipment purchase usually calls for a term loan. If a bank has pulled back an overdraft or the credit file is not perfect, we look at secured alternatives, including secured business loans and, where property is involved, a second mortgage. Trevor Scott and the team search for lenders and structures that suit unusual cases Australia-wide.
Mistakes to avoid
- Using an overdraft as a long-term loan.
- Taking a term loan when a revolving facility would cost less in interest for the same need.
- Overlooking fees and review terms.
- Applying to several lenders at once, which can leave multiple enquiries. See why applying for loans everywhere hurts your credit score.
- Not keeping the paperwork ready. What documents do I need for a loan is a useful checklist.
Illustrative examples
These are illustrative only, with no real businesses and no pricing implied.
A café owner pays suppliers weekly but sees takings dip in winter. A line of credit sized to the shortfall can be drawn in the quiet months and repaid in the busy ones, rather than borrowing a lump sum that sits idle.
A tradie buying a work vehicle needs a lump sum and a fixed schedule. A term loan or asset finance matches the purchase, and the asset becomes the security.
A consultant waiting 60 days on invoices might use an overdraft for short gaps, or move to a line of credit if the delays are regular. If the gaps stretch out, funding that is tied to invoices may fit better.
How do you move from one to another?
Needs change. A business that began with an overdraft may outgrow it, and a household that used a personal line of credit for a renovation might want to refinance it into a term loan with fixed repayments. When that happens:
- Ask the current lender for a payout or balance and any exit fees.
- Work out what the money was really used for, which tells you whether a revolving or fixed structure is more suitable.
- Check what security is registered and whether it can be released.
- Gather current financials and statements ahead of time. See how to get your bank statements for a loan.
Restructuring early, while accounts are in good order, usually gives more options than waiting until the lender calls a review.
How should you decide?
Start with three questions. First, is the need one-off or recurring? One-off points to a term loan, recurring to a revolving limit. Second, how certain is the timing? If you know exactly when money will come in, a short facility is fine; if not, a larger buffer helps. Third, what are you willing to secure? Unsecured facilities are usually smaller, while secured ones can be larger but put an asset behind the debt. Write the answers down, then compare facilities on limit, fees, review terms and security. You can also test repayment amounts on our loan calculator before deciding.
Sounds like you need flexible funding?
Sounds like you’re looking for a line of credit, overdraft or term loan that fits how your money moves. We’re the lending experts in flexible credit facilities, so see if you qualify and we’ll point you to the right structure.
Frequently asked questions
What is the difference between a line of credit and an overdraft?
An overdraft is attached to a transaction account and lets the balance go negative up to a limit. A line of credit is typically a separate facility, sometimes with its own account, that you draw on and repay as needed. Both are revolving, but they can differ in how they are accessed, secured and reviewed.
How is a line of credit different from a term loan?
A term loan gives you a lump sum with a repayment schedule that reduces the balance over a set term. A line of credit gives you a limit you can use repeatedly, and you generally pay interest only on what you have drawn. Term loans suit specific purchases, while lines of credit suit ongoing or irregular needs.
Are lines of credit and overdrafts secured?
They can be either. Business facilities are often secured by property or business assets, and unsecured versions usually have lower limits. Personal lines of credit can also be secured, for example by home equity. Whether security is needed depends on the amount, your credit profile and the lender's policy.
Can a lender withdraw or reduce my limit?
Often yes, within the contract terms. Facilities are usually subject to review, and lenders can reduce a limit or decline further draws if circumstances change or conditions are breached. That is different from a term loan, where the amount is fixed once drawn. Read the review and withdrawal terms before relying on a facility.
Which is best for a small business with uneven cash flow?
Many small businesses use a business line of credit or overdraft to cover timing gaps, such as waiting for customer payments, and a term loan for larger one-off costs. The best fit depends on the business's cash flow, security and goals, so it is worth comparing structures and fees with a broker.
Do these facilities affect my credit score?
Applications create credit enquiries, and the way you manage the facility, including payments and how much of the limit you use, can influence your credit file. Missed payments can be recorded. Reading about credit reports and enquiries on MoneySmart or from a credit reporting body gives more detail.