For common people, Cheque and Overdraft may mean the same as both link to the way of withdrawing money, but they have a lot of difference in terms of meaning and financial procedure.
Overdraft vs Cheque
The difference between Overdraft and Cheque is that Overdraft allows you to withdraw money more than the current balance in your savings account whereas Cheque lets you withdraw 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 a completely 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.
Comparison Table Between Overdraft and Cheque (in Tabular Form)
|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 kind of document that lets the customer withdraw the specified amount of money mentioned in the cheque.|
|Withdrawal limit||You can withdraw any sum of amount even if your fund is less than the account balance.||You can withdraw only the specified amount of money mentioned in the document.|
|Collateral||Overdraft facility is given only against some asset pledge.||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.|
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 makes sure that you do not have a check that is imposed on you for insufficient funds, which you shall be unable to pay.
The different types of Overdraft –
- Standard Overdraft
- Checking Overdraft
- Secured Overdraft
- 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 easily available as it does not require typical paper works.
Disadvantages of Overdraft:
Higher rate of interest: Overdraft facility usually has a higher rate of interest, unlike normal 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: One important disadvantage of overdraft is significantly reduces your credit score, which puts a bad 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 is issued by an individual. It lets the drawee withdraw the sum of money specifies in the cheque to his or her bank.
Cheque facility is the best way of transferring money for those who have less knowledge about digital payments like NEFT, UPI, Online payment apps.
The different types of Cheque are –
- Bearer Cheque
- Order Cheque
- Blank Cheque
- Ante Dated cheque
- Post-dated Cheque
- Stale Cheque
- Crossed Cheque
- Banker’s Cheque and others.
Advantages of the cheque:
Date facility: Cheque 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 of carrying a cheque without hesitation.
Disadvantages of the cheque:
Time-consuming process: For a bank to change the cheque into cash, it 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 failure of the payment.
Main Differences Between Overdraft and Cheque
The key differences between them are listed below:
- 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 withdraw from your bank.
- Overdraft is a kind of small loan that leads you to interest rates or even sign collateral. Whereas cheque has nothing of that kind of issue.
- Overdraft affects your credit score but cheque does not.
- Overdraft is an instant method, you receive money anytime you need. Whereas cheque takes time to be processed (1 week).
- Overdraft is not secure it may lead to debt but the cheque is safe and secure.
So, which one do you feel is the right fit for you – overdraft or cheque? Always make sure that both these terms link to money and they expect you to return it if made a mistake.
Overdrafts are always something tricky as they have no signed paper works. They can raise your interest rates and have hidden fees.
For rent payments or medical payments overdraft can be a good choice over cash credit. Cheque simultaneously is more secure regarding cash transfer.
Thus now you have a clear concept of these two financial terms. Choose wisely!
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