Distinguish between Loan & Overdraft and Cash credit & Overdraft.
Loan and Overdraft:
Loan is defined as a financial arrangement, in which bank provides an advance to the borrower. On the other hand, overdraft is an arrangement between bank and its customer where customer can withdraw from the bank more money than is available, in his account.
Rate of interest on loan is slightly lower as compared to interest charged on an overdraft.
Loans to individuals are provided against personal security and guarantee of another person. Loan to trade, industry and agriculture are provided against tangible and intangible securities. On the other hand, an overdraft is provided by banks against collateral securities or personal security of the borrower.
In case of loans, borrower is liable to pay the interest on the entire amount of loan whereas in case of overdraft interest is always charged on the amount that is actually overdrawn by the borrower.
Cash Credit and Overdraft
Cash credit is a financial arrangement between the bank and customer in which bank permits his customer to borrow money upto a specified limit against security of tangible assets or guarantees whereas. overdraft is an arrangement between bank and its customer where customer can withdraw from bank more money than is available in his account
A cash credit is generally more permanent financial arrangement as compared to overdraft.
In case of an overdraft, banks obtain a promissory note from the customer because in case of default the customer is to repay the overdraft. In case of cash credit, no such promisory note is obtained from the customer by banks.