Difference Between Overdraft and Cheque

For ordinary people, Cheque and Overdraft may mean the same as both link to the way of withdrawing money, but they have a lot of differences in terms of meaning and financial procedure.

Key Takeaways

1. An overdraft is a banking facility that allows account holders to withdraw more money than they have in their account up to a predetermined limit. At the same time, a cheque is a written document instructing a bank to pay a specific amount to a designated recipient.
2. Overdrafts help account holders manage temporary cash flow issues by providing access to additional funds, while cheques facilitate the transfer of funds between accounts without the need for cash.
3. Overdrafts usually come with interest charges or fees for the borrowed amount, while cheques may involve minimal or no fees, depending on the bank and type of account.

Overdraft vs Cheque

The difference between Overdraft and Cheque is that an Overdraft allows you to withdraw more money than the current balance in your savings account. In contrast, Cheque lets you remove the amount specified in the paper (within your account balance).

An overdraft allows you to withdraw money even when your account balance reaches zero. To say it is a kind of small loan with interest.

The cheque has an entirely different sense. It is a document that orders the bank to pay a certain amount of money in whose name the cheque is written.

It does not let you withdraw more than the account balance.

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Comparison Table

Parameter of Comparison	Overdraft	Cheque
Character	Overdraft refers to the continuous withdrawal of money by the customer, even if your balance is zero or below the issued amount.	The cheque is a document that lets the customer withdraw the specified amount of money mentioned in the cheque.
Withdrawal limit	You can withdraw any sum even if your fund exceeds the account balance.	You can withdraw only the specified amount of money mentioned in the document.
Collateral	The overdraft facility is given only against some asset pledges.	The Cheque facility does not require any collateral issuance.
Requirement	You need to talk to your bank before an overdraft withdrawal.	The customer and the issuer both need to have a check facility in their bank accounts.
Security	Overdraft leads you to debt if you go on continuously withdrawing money.	They are safe, and the drawer cannot withdraw any extra amount from your account.

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What is Overdraft?

Overdraft provides the customer with an extension tool when the account balance reaches zero. Primarily to say the bank lets you borrow a small amount of money.

There is an interest in the principal sum and a typical overdraft fee. In many banks, an overdraft fee may rise to $30.

Overdraft Protection provides the customer with a tool to manage their checking out. Overdraft protection ensures that you do not have a check imposed on you for insufficient funds, which you shall be unable to pay.

The different types of Overdrafts –

1. Standard Overdraft
2. Checking Overdraft
3. Secured Overdraft
4. Business Overdraft

Advantages of Overdraft:

Helpful: Overdraft helps you pay if you are running a little money short on your rent payment, gas bill, prepaid bills, and others.

Flexibility: It allows you to change the amount of money you borrowed by limiting the interest, and it is readily available as it does not require regular paper works.

Disadvantages of Overdraft:

Higher rate of interest: An overdraft facility usually has a higher interest rate, unlike regular bank loans. They also have hidden fees.

Bank can also put a sudden time limit for you to pay back the borrowed money.

Affect Credit rating: A critical disadvantage of overdraft is significantly reducing your credit score, which puts a wrong impression of you in the market. This might lead you to pay a reduction in the withdrawal limit of your bank account.

 

What is Cheque?

A cheque is a document that an individual issues. It lets the drawee withdraw the sum of money specified in the cheque to their bank.

A Cheque facility is the best way to transfer money for those with less knowledge about digital payments like NEFT, UPI, and Online payment apps.

The different types of Cheque are –

1. Bearer Cheque
2. Order Cheque
3. Blank Cheque
4. Ante Dated cheque
5. Post-dated Cheque
6. Stale Cheque
7. Crossed Cheque
8. Banker’s Cheque and others.

Advantages of the cheque:

Date facility: Cheques can be made antedated or post-dated according to the person. Payment can also be stopped for security reasons.

Error-free: It is a simple method of money transfer. The individual does not require to count the money manually.

It is also a cashless transfer that gives the freedom to carry a cheque without hesitation.

Disadvantages of the cheque:

Time-consuming process: For a bank to change the cheque into cash requires a long time. It is time-consuming.

You cannot have your money if you have an urgent requirement.

Signature: For drawing a cheque, the individual has to sign on the paper. An inconsistency in the signature or wrong signature might lead to the failure of the payment.

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Main Differences Between Overdraft and Cheque

The key differences between them are listed below:

1. Overdraft is the amount of extra money that is withdrawn from your account after your balance reaches zero. A cheque is a fixed amount of money that you can start from your bank.
2. Overdraft is a kind of small loan that leads you to interest rates or even sign collateral. At the same time, a cheque has nothing of that kind of issue.
3. Overdraft affects your credit score, but a cheque does not.
4. Overdraft is an instant method; you receive money anytime you need it. At the same time, a cheque takes time to be processed (1 week).
5. Overdraft is not secure. It may lead to debt, but the cheque is safe and secure.

References

1. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.kluwer/erpl0018&section=92
2. https://academic.oup.com/rfs/article-abstract/27/4/990/1603971