Cash Credit vs. Overdraft: Know the Difference

Cash credit and overdraft are two credit facilities that offer assistance during a fiscal crisis. On the surface, cash credit and overdraft may appear the same, but they vary in features as well as the purpose they serve. 

Continue reading to find out the difference between cash credit and overdraft.

Cash Credit vs. Overdraft - At a Glance

The differences between CC and OD extend beyond their purpose. The table below lists some of their major differences. 

What is Overdraft?

An overdraft is a credit facility offered by lenders such as private and public sector banks that allows you to withdraw an amount that is greater than your existing account balance up to a certain limit. 

This is a great option for short term requirements especially business expenditure such as those needed for new machinery or equipment. Ideally this amount should be used for expenses that can be repaid soon.

Salient Features of an Overdraft

• The amount offered will vary depending on your existing relationship with the bank.

• The interest rate is charged only for the overdraft amount and is generally calculated on a daily basis. 

• Additionally, the repayment is generally not done through EMIs but in a cumulative manner.

• In case your debt surpasses the limit, you will have to pay the amount immediately, or else the bank will stop providing additional credit. Your credit score will also be impacted.

• Also, if you are a joint applicant of an overdraft facility, both of you will be responsible for the debt. It is important to note that the lender can choose to recover the amount from you even if the other account holder withdraws the excess amount.

Types of Overdraft Facilities

There are two types of overdraft facilities - secured and unsecured. 

To get a secured one, you have to pledge an asset as security to the bank such as property, deposits, or shares. If you fail to repay your debt, the bank will have the power to take over the pledged asset and sell it. If the amount after selling your asset is less than the amount you withdrew, you will have to pay the difference.

An unsecured one does not require any collateral but the amount offered will depend on your income.

What is Cash Credit?

A cash credit on the other hand is a facility that is designed keeping in mind the needs of small and medium business owners. 

It is a short-term loan that can help business owners in meeting the working capital needs of their business. Generally, cash credit is a facility that is offered to business owners and not to individuals. 

Salient Features of Cash Credit

• It is a short term loan provided by lenders through which borrowers can utilize money without having a credit balance.

• There is a limit that the borrower has to adhere to and interest will be charged only on the amount borrowed.

• Eligibility will depend on your age, years of business experience, how old the company is, credit score etc.

• To avail cash credit, you will almost always need to provide collateral

• Interest rates are relatively lower as compared to overdraft and is calculated based on the entire amount withdrawn

• A new account will have to be opened to avail a cash credit

In addition to knowing the difference between cash credit and overdraft, you should also keep the following points in mind.

For example, processing fees can vary considerably from bank to bank, so be sure to check what you will be paying before signing up for a loan. Similarly, interest rates and limits placed on loan amount utilization may vary from bank to bank as well. Some banks do charge extra on the unutilized loan amount after a specific period.

Finally, if you would like to close out an account in the future and receive a refund of any unused funds remaining in your account, you may have to pay a foreclosure fee as well.

Does moneyview offer Cash Credit or Overdraft?

moneyview does not offer overdraft or cash credit facility. However, we do offer an alternate financing option which is a personal loan.

Our personal loans come with an easy application process, minimal documentation, and flexible repayment terms. You can avail a loan ranging from Rs. 5,000 to Rs. 10 lakhs within 24 hours of application approval. 

All you need to do is visit our website or download the app and apply today.

Conclusion

In India, short-term financing is offered by financial institutions in the form of cash credit and overdrafts. Cash credit and overdrafts are popular forms of borrowing among Indian entrepreneurs. Both types of borrowing are secured by collateral, however, overdrafts are much more expensive than cash credits.