Explain the following term/concept: Overdraft
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Solution and Explanation
Credit Facility: It is an extension of credit, not the account holder's own money.
Pre-sanctioned Limit: The bank sets a maximum limit for the overdraft based on the customer's creditworthiness.
Interest Calculation: Interest is charged only on the actual amount overdrawn and for the period it is used, not on the entire sanctioned limit.
Flexibility: The borrower can withdraw and repay funds as needed within the limit, making it a highly flexible source of short-term finance.
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