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What is an Overdraft?
An overdraft is a short-term credit that a bank grants to account holders against provided checks exceeding the amount of cash available in the account. In an overdraft, excess cash is withdrawn instead of money available in a current account.
It is a form of credit or short-term loan granted by a financial institution when an account reaches zero with a prior agreement of interest rate. It is a repayable debt on which the customer pays a specific amount of interest.
A few forms of overdrafts are intentional loans, ATM overdrafts, unexpected electronic withdrawals, merchant errors, bank fees, etc. There are several advantages of overdrafts. It can help you in paying bills and bear unexpected expenses. It is a less expensive form of burrowing than credit cards and payday loans.
It is beneficial, flexible, and cheaper than credit cards or payday loans. You can use it occasionally because it is quick to arrange. Responsible use of overdraft is a unique tool that can help you in tough times. You can take advantage of an overdraft if you repay it soon.
A current account is a bank account you can deposit and withdraw money to facilitate your personal finance. Different banks have various current accounts that offer additional features per your need. After the recent account opening, you are given an account number, checkbook, and debit card to access your funds or money.
Current accounts are most used in banking sectors. It helps enable transactions, other bill payments, phone bills, utility bills, rent payments, cash deposits, and withdrawals using chip debit cards. The most crucial feature is current account bears no interest at all.
You can enjoy many benefits like online banking, payments for shopping by debit cards, bill payments, online funds transfers, etc. It enables businesses to do prompt transactions. You can deposit and withdraw money without any limitations in your home branch.
It allows direct payments using cheques, demand drafts, pay orders, or online funds transfers. It also provides an overdraft facility.
Difference Between Overdraft and Current Account
Overdrafts and current accounts are the services that allow financial transactions. Both are different in their mode of operation.
- An overdraft is a current account’s feature or facility that enables a person to withdraw more money than the account holds. In contrast, a current account enables a person to withdraw a current amount from their account. ‘
- In an overdraft account, the bank holder has to pay some interest on the loans made from his account. In contrast to this, the current account bears zero interest.
Comparison Between Overdraft and Current Account
|Flexibility||An overdraft allows customers to use money in an emergency without having enough credit.||A current account will enable customers to deposit and withdraw money as per requirement.|
|Interest||In an overdraft bank charges the consumer a specific interest on availing the facility.||In the current account, there Is no interest.|
|Withdrawal limits||In an overdraft facility, there is a particular limit.||You can withdraw funds from an ATM, without limitation, in a current account.|
|Benefits||Individuals and small businesses get benefits to maintain cash flow.||Large-scale companies or massive businesses and Individuals with huge funds can perform day-to-day transactions.|
- Lavoie, M., 1985. Credit and money: the dynamic circuit, overdraft economics, and post-Keynesian economics. In Money and Macro Policy (pp. 63-84). Springer, Dordrecht.
- Faruqee, M.H. and Debelle, G., 1996. What determines the current account? A cross-sectional and panel approach. International Monetary Fund.