Differences between Overdraft and Cash Credit

Differences between Overdraft and Cash Credit

The distinction between Overdraft and Cash Credit is very subtle and relates to the operation of the account. In the case of Cash Credit, a proper limit is sanctioned which normally is a certain percentage of the value of the commodities/debts pledged by the account holder with the Bank. Overdraft, on the other hand, is allowed against a host of other securities including financial instruments like shares, units of mutual Rinds, surrender value of LIC policy and debentures etc. Now the differences between these two are discussed below:

Common Differences between Overdraft and Cash Credit:

Overdraft

  • Definition: A loan made to a customer with a current account at a bank or building society, in which the account is allowed to go into debt, usually up to a specified limit.
  • Duration: Overdraft is always provided for a short-term or period.
  • Process for Withdrawals: The borrower is permitted to draw and repay any number of times, provided the total amount overdrawn does not exceed the agreed amount.
  • Nature of Withdrawals: Overdraft is withdrawn only when the borrower needs more money than the amount available in his/her account.
  • Guarantee: This is granted against securities
  • Bank Account: Overdraft is allowed for or provided to the current account holders of the bank.
  • Loan Amount: The amount for an overdraft is limited to an agreed extent for the current account holder.
  • Repayment: The borrower is permitted to repay any number of times.

Cash Credit

  • Definition: A cash credit is an arrangement by which the customer is allowed to borrow money up to a certain limit.
  • Duration: Though it is a short-term loan, sometimes it is provided for mid-term of periods.
  • Process for Withdrawals: The loan amount can be withdrawn by the borrower at once or when required.
  • Nature of Withdrawals: The borrower need not draw the sanctioned amount at once but draw the sum when required.
  • Guarantee: Cash credit is provided against pledge or hypothecation of goods.
  • Bank Account: A new bank account is created for sanctioning cash credit.
  • Loan Amount: Cash credit is granted to a borrower to a certain limit based holders, on the security and need of the customer.
  • Repayment: The loan may be repaid in installments or at the expiry of the certain period.

At a glance, these are the distinctions between Bank Overdraft and Cash Credit.

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