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Difference between Cash Credit and Overdraft


Cash credit: It is a short term loan provided by bank to the borrower. The borrower must have an account in bank. The bank charges interest on running balance of cash credit account not on loan limit. The amount is used to fulfil the working capital requirement of a company.

Overdraft:
The overdraft facility is provided by bank to its customers. This facility is provided to current account holders only. Under this facility the customers are allowed to withdraw amount more than the credit balance in his account. The bank charges some interest on amount withdrawal from bank. The interest amount is decided by bank according to the customer’s repaying capability.
The duration of the cash credit loan and bank overdraft is same that is approximately one year. Both cash credit loan and bank overdraft provided by bank to meet the financial need of a customers.

Let’s find out the difference between cash credit and overdraft:
Point of difference
Cash Credit
Overdraft
What is cash credit and overdraft?
It is a short term loan which is used to fulfil the working capital requirement.
It is provided by bank to its current account holder to withdraw amount more than the current account balances.
What are the types of cash credit and overdraft?
Cash credit is two types first is open cash credit and second is key cash credit. Open cash credit is one which is not under the possession of bank. Key cash credit in which the stocks are under the possession of bank.
Overdraft is two types first is secured overdraft and clean overdraft. In secured overdraft the assets are kept as security. In clean overdraft facility the assets are not kept as security.
Secured by assets or property
In cash credit loan is granted against assets by bank. In cash credit the inventory and receivables are kept as security against loan.
The overdraft facility is provided by bank to its current account holder. No assets are kept as security.
Is cash account needed in cash credit and overdraft?
In cash credit if borrower don’t have any current account then the bank first of all open the cash credit account which function as current account and then transfer the loan amount into the account and the bank provides the cheque facility to customer to withdraw the amount from account.
The current account is needed to use overdraft facility. Only current account holders use the overdraft facility.
Interest charged by bank in cash credit and overdraft
In cash credit the interest charged is less than the overdraft by bank.
The bank charges higher interest rate in comparison to cash credit loan provided by bank.
How to use cash credit loan and bank overdraft?
The cash credit loan is used to fulfil the working capital requirement of a company.
The overdraft facility is used by current account holder of a bank to fulfil any purpose of customer.
Repayment of cash credit loan amount and bank overdraft amount to bank
The loan amount is repaid in one year or a borrower can renew the loan for next period.
The overdraft amount is repaid when demanded by bank approximately in one year.






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