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:
- 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- Nature of Withdrawals: Overdraft is withdrawn only when the borrower needs more money than the amount available in his/her account.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.
- 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- Process for Withdrawals: The loan amount can be withdrawn by the borrower at once or when required.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.