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Difference between overdraft and loan

enero 27, 2020

To meet the financial requirements of the firm, the businessman should identify the purpose and term for the available credit, i.e. that nothing better than a loan if the amount needed to meet long-term financial requirements and if funds are needed to meet the working capital requirement, then it is discovered the best option.

Finance is the backbone of every company because in the absence of sufficient funds the company cannot function properly. From the day the decision to start a business is made, the need to finance is realized. purchase of plant and machinery, inventory, office furniture and so on, while a certain amount is required to undertake regular operations.

The capital introduced by the owner may not be adequate to meet all the financial requirements of the company, rather the entrepreneur must look for different sources. There are many options present before the entrepreneur to take advantage of finance, and so loans and overdrafts have entered the scene.

Take a reading of the article to understand the difference between overdraft and loan.

Comparative chart

Basis for the comparison
SenseThe discovered an agreement under which the customer authorized to withdraw the excess balance as a credit in the checking account, but only up to a certain limit.The loan refers to the fixed sum of money borrowed for a defined period, against a guarantee, which should be repaid with interest.
What is it?Credit structureCapital borrowed
SourceShort-term fundsLong-term funds
InterestDebt on the overdraft amount.Debt on the sanctioned loan.
Calculation of interestDaily basisMonthly basis
RefundThrough deposits in the bank account.Or on request or on fixed monthly installments.
does a person need to have a bank account to use this service?Yes, he / she should have a checking account in the respective bank.No, not mandatory.

Definition of overdraft

Discovered a loan line provided by banks to holders of a current account, in which allowed to withdraw an amount greater than the credit balance in their account. However, withdrawals can only be made up to a certain amount, i.e. overdraft limit, which depends on the customer's credit rating and varies from customer to customer.

The overdraft facility allows a natural or legal person to withdraw short-term funds as and when required and repay the same via account and interest deposits. Customers can take advantage of this possibility by sending a written request to the bank for the concession. The structure sanctioned for a year, after which it must be renewed. The renewal of the structure at the discretion of the lender, depending on the satisfactory conduct of the account.

a bit like a revolving loan where the customer deposits the amount with the bank to re-borrow it. Therefore, interest is debited from the daily debit balance of the checking account. The bank or financial institution has the right to reduce the overdraft limit or to cancel the facility at any time. Consequently, the amount due can be called by the bank at any time for a refund without notice to the account holder.

Loan definition

The term 'loan' intended as the fixed amount of credit extended by banks, for a specified term, which must be repaid in the future, together with interest according to the repayment plan stipulated.

It is an agreement between the lender (banking company) and the borrower (customer) in which the lender transfers money to the borrower, for a particular period, which must be returned together with the interest on it in the future. The transfer of funds made against guarantees, such as land, buildings, vehicles, gold and the like. If the borrower delays the payment or the defaults in the payment, the lender has the right to realize the residual amount by selling the title.

The customer's credit record plays an important role in determining whether the borrower has the repayment capability or not. Therefore, on the basis of the ratings provided by the recognized credit rating agencies, the amount of the loan sanctioned.

Key differences between overdraft and loan

The following points clarify the difference between overdraft and loan, considering different parameters:

  1. An agreement in which the bank customer authorized to withdraw an amount greater than the balance in the current account called the overdraft. The fixed sum of money borrowed for a certain period, against security and is presumed to be repaid with interest in the future called a loan.
  2. While I discovered a line of credit provided by the bank to its customers, the loan borrowed the capital borrowed from the customer by the bank.
  3. The discovered a short-term funding source; which meets the company's working capital requirement. On the other hand, lending is a means of long term financing; which helps in the acquisition of real estate such as land, buildings, furniture, etc.
  4. Overdraft interest is charged on the excess amount and not on the sanctioned limit, while interest on the loan is charged on the entire sanctioned sum.
  5. The interest for the overdraft calculated on a daily basis, until the full repayment of the overdraft amount. Conversely, interest on loans is calculated on a monthly basis, bearing in mind the amount loaned and the term.
  6. The repayment of the overdraft can be made through deposits made in the bank account. On the other hand, the loan amount can be repaid, depending on the type of loan, that is, if it is a loan on demand, the sum must be repaid at the request of the banker, but in the case of the time loan, the sum payable in comparable monthly installments (EMI).
  7. For the overdraft function in a current account, a natural or legal person must have a current account with the respective bank. On the contrary, there is no pre-condition such as to hold a bank account for borrowing.

Conclusion

In short, the overdraft facility that allows an individual to continue withdrawing the sum from his checking account, even if the available balance is zero. The downside, the loan the fund borrowed from the bank against the guarantee. The interest rate thus imposed for the overdraft above the loan.

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