What Is The Difference Between Overdraft (OD) and Cash Credit (CC)?

What Is The Difference Between Overdraft (OD) and Cash Credit (CC)?

When it comes to taking a loan for a business, the owner or the corporate has two possibilities. They can either select long-term finance like a loan against property (LAP) or decide on flexible funding. Flexible funding includes  Cash Credit (CC) or Overdraft (OD). Long-term funding has a lower interest rate, however flexible funding allows you to save interest by depositing extra funds in the account and paying interest only on the amount you require.

Did you know?

An overdraft facility is offered to companies to withdraw money that exceeds the amount available in their accounts.

What is an OD Account

The full form of OD Account is Overdraft Account. It's a form of account where a bank allows a transaction or allows you to withdraw money even if you don't have money in your account. The bank allows you to borrow a specific amount of money. The bank levies an overdraft fee or an interest on the amount you have borrowed. You are responsible for paying that amount to the bank within the time frame it mentions. It is a current account. On the amount due by the end of the day, one must pay interest.

Also read: IMPS (Immediate Payment Service)- What is IMPS Transfer, IMPS Payment, Timings & Limit

What is an Overdraft facility?

An overdraft is a financial facility or instrument that allows you to withdraw money from your bank account (savings or current) even if your account balance is zero. When you use an overdraft, the bank charges you an interest rate, just like any other credit facility. To get an overdraft limit, you usually have to pay a predetermined interest rate.

 

Features of an overdraft facility

  1.  Banks provide overdrafts up to a certain amount, which varies from borrower to borrower.
  2. A running account with an overdraft limit is one in which you can deposit or withdraw money at any moment up to the set limit.
  3. The bank charges a predetermined rate of interest on the overdraft amount used by the borrower. Interest is calculated on a daily basis and billed/debited to you monthly. If you don't pay the due overdraft amount, the interest rate will go up.
  4. Unlike most loans, where you must pay a prepayment penalty if you pay off your loan early, banks do not charge prepayment penalties on overdraft limits. You can pay off the overdraft in full without incurring any prepayment penalties if you pay it off in installments.
  5. You can pay off your overdraft in various quantities whenever you have the funds. When it comes to overdraft limitations, the EMI method, which is common with most loans, does not apply.
  6. While there is no set monthly repayment schedule for overdraft loans, the amount you owe should not exceed your overdraft limit.
  7. Overdraft limitations are available to joint borrowers. Both applicants, however, share equal responsibility for repaying the sanctioned Overdraft limit.

Different types of collateral accepted by banks against overdraft loans

  1. Overdrafts against your house or property
  2. Business inventory or equipment
  3. Accounts receivables - Banks accept the security of invoices that have not yet been paid. When the payment is done it gets credited to the Bank
  4. Stocks as well as Investment shares
  5. Insurance policies

Also read: All About UPI– United Payments Interface

Types of overdraft

Overdraft against Property

Your home is used as collateral for an overdraft facility. Customers with a house loan who require funds to pay off their current debt are also eligible for an overdraft. The property is assessed, valued, and surveyed before the residence is approved as collateral. Due to the fact that overdraft funds are issued against property as collateral, they are not disbursed promptly. The approved overdraft amount is normally between 40% and 50% of the property's value. When providing an overdraft against your home as collateral, your credit history and repayment capacity are also taken into account.

Overdraft Facility against Fixed Deposits

As compared to acquiring an overdraft using your home as collateral, getting an overdraft using Fixed Deposits (FDs) and life insurance policies as collateral is simple. One of the reasons is that evaluating a property takes time. In any scenario, the lender prefers overdraft against FD because the customer's FD account is with the lender and the lender knows the consumer better. If you take out an overdraft against your fixed deposit, you'll be able to get a bigger percentage of the sanctioned amount, around 75%. If you hold an FD as collateral, the interest rate charged is also lower. Banks usually charge 2% more interest than the interest you earn on a fixed deposit if you retain it as collateral

Overdraft against Insurance Policy

If you use your insurance policy as collateral for an overdraft, the amount you can borrow is determined by the surrender value of your policy. The loan to value of an insurance policy is higher than the loan to value of a fixed deposit, which means that if you keep your insurance policy as collateral, you will obtain more money sanctioned from the bank than if you hold a fixed deposit of the same amount as collateral.

Overdraft against Equity

Although equity is not recommended as a form of security, it can be used to get an overdraft facility. The reason for this is that stock is market-dependent, and so its value varies. As a result, the percentage of overdrafts approved with equity as security is lower.

Overdraft against Salary

Banks also provide overdrafts against salaries for salaried people. An overdraft limit of up to 2-3 times your salary is possible, but this varies by bank. To qualify for such an overdraft, you must have a salary account with the bank in question. A short-term lending facility is another name for this type of facility. The major source for banks to sanction borrowing restrictions is the overdraft balance sheet.

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