The Difference between Overdraft and Cash Credit is very subtle and relates to the operation of the account.
While; 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.
It is a short-term loan to the account holder (company/individual).
On the other hand; overdraft; is allowed against a host of other securities, including financial instruments like shares, units of mutual funds, surrender value of LIC policy and debentures, etc.
An overdraft is an extension of credit from a lending institution when an account reaches zero.
Overdraft means; bank allows you to withdraw money using your account up to a certain limit, even when the balance has reached 0(Zero).
Now the differences between these two are discussed below;
Points of Difference | Overdraft | Cash Credit |
Definition | A loan is 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. | Cash credit is an arrangement by which the customer can borrow money up to a certain limit. |
Duration | OD is always provided for a short-term or period. | Though it is a short-term loan, sometimes it is provided for mid-term periods. |
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. | The borrower can withdraw the loan amount at once or when required. |
Nature of Withdrawals | Overdraft is withdrawn only when the borrower needs more money than the amount available in their account. | The borrower need not draw the sanctioned amount at once but draw the sum when required. |
Guarantee | This is granted against securities. | Cash credit is provided against the pledge or the hypothecation of goods. |
Bank Account | Overdraft is allowed for or provided to the current account holders of the bank. | A new bank account is created for sanctioning cash credit. |
Loan Amount | The amount for OD is limited to an agreed extent for the current account holders. | Cash credit is granted to a borrower to a certain limit based on the security and need of the customer. |
Repayment | The borrower is permitted to repay any number of times. | The loan may be repaid in installments or at the expiry of a certain period. |