What is Overdraft?
An overdraft is a type of short-term loan that allows you to exceed the amount in your account, and is given to current account holders. It is a financial service that can be accessed by depositors who need to meet emergencies while running their businesses.
However, you need to know that an overdraft is not free. The borrower will incur an interest charge for the amount they borrow, at a higher rate than other types of loans. There is also an additional fee charged for the service.
With an overdraft, customers can borrow money from their bank to meet their short-term financial needs, including personal ones. To access an overdraft, customers must have a good credit score and have been with the bank for a stipulated period.
Some banks charge an overdraft fee every time you use the facility. This can be costly if you are not careful. The seemingly small charges accumulate to quite some amount with time. Plan your finances so you will not have to take out overdrafts frequently.
What is Cash Credit?
Cash credit is a type of loan that is given to a borrower in exchange for collateral. The borrower can use the money to meet their business obligations, but the lender has to be repaid before the borrower can use it again.
The interest rate on cash credit loans is higher than other loans. This is because lenders are unsure if they will get their money back from borrowers who may not have much collateral.
A cash credit allows businesses to buy products and services without having to pay for them immediately. This means they can take care of their expenses in installments, reducing the company’s risk and making it easier for them to plan their finances.
The main reason businesses take cash credits from banks is because it helps them manage their cash flow better by enabling them to buy products and services now instead of waiting until later when they have collected enough money from customers.
This is great because it means a business can continue with its operations even when they run out of liquid cash. In addition, it helps them keep their customers happy and maintain their credibility.
Difference Between Overdraft and Cash Credit
Overdrafts are a form of short-term credit too. However, rather than ask the bank for a loan, a current account holder can withdraw over and above what he has in his account. For that privilege, he is charged an interest and a service fee.
Cash credit is a means of borrowing money from your bank account, which can be used to cover short-term cash shortages. It is a good option for people with a low limit or those who don’t want to sign up for an overdraft protection plan.
Comparison Between Overdraft and Cash Credit
| Parameter of Comparison | Overdraft | Cash Credit |
| Interest rate | It has a higher interest rate. | It has a lower interest rate. |
| Limit | The credit limit decreases each month. | The limit does not decrease with time. |
| Availability | It s available for short periods up to 1 year. | It is available for durations longer than 1 year. |
| Guarantee | It is given against client-bank relationships and trustworthiness. | It is only against securities such as bonds and stocks. |
| Purpose | It can be spent on business or on anything else. | It is only used to meet business needs. |