What is an Overdraft and What is a Loan? The Differences (2024)

FAQs

What is an Overdraft and What is a Loan? The Differences? ›

An overdraft is like any other loan: The account holder pays interest on it and will typically be charged a one-time insufficient funds fee. Overdraft protection is provided by some banks to customers when their account reaches zero; it avoids insufficient funds charges, but often includes interest and other fees.

An overdraft is a variable amount of borrowing agreed with your bank up to a set limit. A loan is a fixed amount of borrowing over a set term with regular repayments. Overdrafts allow you to borrow money as and when you need it up to a limit agreed between you and the bank.

An overdraft occurs when you don't have enough money in your account to cover a transaction, but the bank pays the transaction anyway.

An overdraft lets you borrow money through your current account by taking out more money than you have in the account – in other words you go “overdrawn”. There's usually a charge for this. You can ask your bank for an overdraft – or they might just give you one – but don't forget that an overdraft is a type of loan.

As a general rule, you should remember that: Overdrafts are for short-term borrowing for unforeseen emergencies. Credit cards are for short-term borrowing and can be used to spread the cost of purchases. Loans are for borrowing larger amounts of money for a specific purchase reason such as a car or holiday.

What Is an Overdraft Fee? An overdraft is a loan provided by a bank that allows a customer to pay for bills and other expenses when the account reaches zero. For a fee, the bank provides a loan to the client in the event of an unexpected charge or insufficient account balance.

If you find yourself running out of cash by month-end, or needing money to cover an urgent payment; an overdraft facility might be the best option for you. If you need to borrow a larger amount to fund larger expenses, like car repairs or home improvements, a personal loan would be better suited.

A bank overdraft is as same as a bank account that can have a negative balance, up to the sanctioned overdraft limit. Example: If your bank account has Rs. 10 lakh in the bank and you withdraw Rs. 12 lakh for business purposes, an overdraft loan is a by-default loan for the extra Rs.

Cash credit is referred to as a short term business loan that is offered to businesses for maintaining the working capital, while overdraft facilities are offered to businesses and individuals who wish to withdraw more than their available balance in the bank account.

An overdraft occurs when something is withdrawn in excess of what is in a current account. For financial systems, this can be funds in a bank account. In these situations the account is said to be "overdrawn".

Is overdraft good or bad? ›

Both personal loans and overdrafts are excellent credit facilities that have their own set of advantages. Personal loans are more suitable for meeting more extensive monetary requirements, whereas overdrafts are ideal for covering more minor, short-term fund requirements.

If you overdraw your checking account, the bank can pull funds from your savings to cover the shortage, as long as you have enough funds available. Your bank may still charge you a fee for transferring the funds automatically, but it is typically less than an overdraft charge.

Overdraft fees can occur when a transaction gives you a negative balance. It's possible to avoid these fees at certain banks, whether you simply opt out of automatic overdrafts, use an account that doesn't charge you an overdraft fee, or sign up for overdraft alerts.

With a Personal Loan, you'll pay back the amount in fixed monthly instalments spread across a defined period that suits your financial planning. Overdrafts, in comparison, have no fixed repayment schedule, offering the freedom to repay the used funds at your own pace, as long as you stay within the credit limit.

Lower interest rates: Typically, Term Loans offer more attractive interest rates compared to Overdrafts, especially for longer-term financing, making them a cost-effective choice for substantial borrowing.

However, your overdraft does affect your credit score if you aren't careful with it. If you regularly go beyond your overdraft limit it will damage your credit rating. That's because it shows lenders you may be struggling financially.

A personal loan provides a lump sum of money, which needs to be repaid regularly over a set period. Interest is charged on the entire amount of the loan. An overdraft is attached to an everyday transaction account and lets you access additional funds when your account balance reaches zero.

What is the difference between overdraft and demand loan? Ans. Overdraft is a credit facility wherein customers can borrow cash up to a set limit, agreed with the bank. Whereas demand loan is a type of short-term working capital loan in which the lender asks for instant repayment as per his/her requirement.

An overdraft gives you immediate access to extra funds when you don't have any left. Ideal for temporary financial issues, unexpected expenses or emergency costs, an overdraft gives you the comfort of knowing you will always have financial back-up. You only pay interest on what you use.

An overdraft is a form of debt and is repayable on demand.