The structural difference
A loan is a fixed-term contract: you borrow a set amount, repay it in fixed monthly instalments over a defined period (typically 1-7 years), and at the end you have paid off the debt.
An overdraft is an open-ended facility: you use it as needed, pay interest on what you use, and there is no built-in repayment schedule for the principal.
Why this matters for debt build-up
Loans automatically pay themselves off. Overdrafts do not. Someone permanently using their overdraft is paying interest indefinitely without reducing the underlying balance.
This is why persistent overdraft use is often more expensive than a loan for the same amount over the same period.
Interest cost comparison
A £2,000 overdraft at 40% APR held constantly costs £800 per year in interest. Over 5 years: £4,000 in interest paid, and you still owe £2,000.
A £2,000 personal loan at 10% APR over 5 years costs about £547 in total interest, and at the end you owe zero.
The difference is stark — but overdrafts are used differently by different people. For occasional short-term use, the flexibility can be worth the higher rate. For permanent debt, a loan is usually better.
Conversion at bank request
If a bank withdraws an overdraft, they often offer to convert it to a loan. This has the effect of switching from open-ended to fixed-term.
Sometimes this is negotiated proactively by the customer too — asking the bank to convert an overdraft into a loan can lock in a repayment schedule and often at a lower rate.