Question

What is the difference between cash credit and overdraft?

Hint:

Cash credit is more commonly used by businesses, while overdrafts are typically for individuals and small businesses.

Answer 1

Step 1: Understanding Cash Credit:
Cash credit is a short-term loan facility provided by banks to businesses, allowing them to withdraw funds in excess of their current account balance, up to an approved limit. Interest is charged only on the amount withdrawn, and the business can continue to borrow within the set limit as long as the loan is repaid within the agreed time frame.
Step 2: Understanding Overdraft:
An overdraft is a facility offered by banks to individuals or businesses that allows them to withdraw more money than is available in their account. It’s a form of short-term borrowing that is typically unsecured and has a limit set by the bank. Interest is charged on the overdrawn amount, and the overdraft limit is generally lower than that of cash credit.
Step 3: Key Differences:
- Cash credit: Primarily used by businesses, often secured against collateral, and generally has a higher credit limit.
- Overdraft: Typically used by individuals or small businesses, generally unsecured, and has a lower credit limit.
Step 4: Final Conclusion:
Cash credit is usually provided to businesses and may be secured, whereas overdraft facilities are more commonly used by individuals and are often unsecured.