Overdraft vs Current Account
Overdraft and current account are two separate banking terms. Banks maintain both the statements for the convenience of customers.
Through a current account, one can withdraw money at per his/her convenience, whereas Overdraft enables the customer to withdraw money more than the funds available in the account.
An overdraft is issued by the bank when their account balance is low or zero. Overdraft enables the customer to have a less financial burden.
The current account gives easy access to the money present in the bank account. Usually, money that is present in the current account doesn’t accumulate interest. This enables the customer to withdraw as much money as possible. This account often used for business purposes.
The main difference between Overdraft and the current account is, Overdraft, enables a person to withdraw more amount than the account holds. And the current account is just the opposite; one can withdraw money from the current account as much as the account holds without any prior notice.
Table of Contents
Comparison Table Between Overdraft and Current Account (in Tabular Form)
|Parameter of Comparison||Overdraft||Current Account|
|Flexibility of Usage||This flexibility allows the customer to use money in an emergency without having enough credit.||This facility allows the customer to draw money anytime, provided enough individual funds in the account.|
|Role of Interest||The bank charges interest to the customer's availing overdraft accounts. This interest is calculated depending on assets offered as security.||Current accounts don't earn any interest due to the flexibility they offer. Banks don’t pay any interest to these account holders.|
|Withdrawal Limits||Overdraft taking against current operational account can withdraw up to fifty thousand INR in cash in a week.||The funds can be withdrawn at any time from the bank or other bank facilities like ATM. There is no specific limit assigned for transactions.|
|Beneficiaries||Useful for individuals, small scale business. For maintenance of enough cash flow.||Useful for large scale businesses, individuals with hefty funds. They are established to carry out day to day transactions easily.|
|Retail banking -offers||No retail banking offers given to overdraft customers. These accounts are like small-term loans provided for maintenance.||This account offers checkbooks, debit cards, internet banking facilities, and also, most importantly, an overdraft facility.|
What is Overdraft?
This is a bank financial instrument where money can be withdrawn from account holders’ accounts, even if there is a nil balance. It’s an extension of the money limit, which often is overdrawn.
These overdraft accounts issued to each account holder, depending on his/her credit rating and relationship with a particular bank. The customer can withdraw money up to a specific limit.
There are specific guidelines to be followed by RBI in INDIA. Banks charge individual interest when customers avail for Overdraft. There are unique features of overdraft account which are as follows-
- Overdraft issued against salary accounts and savings accounts.
- It’s a type of short-term loan, which is to pay within a specified time frame.
- Overdraft entices an individual interest from the time of use; the time limit can be from a couple of days to a few weeks.
- It this account, the full authority is of the particular bank.
- Current account holders can also apply for an overdraft account.
This account helps for a responsible cash flow to meet working capital. So, mostly small-scale businesses opt for this option.
There are specific eligibility criteria for savings and salary account holders to avail of overdraft facilities. The credibility of the customer with the bank is an essential factor. The customer needs to maintain a healthy salary account, where salary credited timely to avail Overdraft on salary account.
The interest on Overdraft is calculated at the rate negotiated between the bank and account holder in the document signed—the interest calculated daily. For example, if the interest rate on OD (Overdraft) is 10% per annum, then the calculations are based on the outstanding balance daily.
What is Current Account?
This financial account is one type of deposit account upheld by individuals who need to carry out large transactions with the respective bank daily.
Current account need not hold the minimum balance; the main feature of this account enables the account holder to make numerous deposits and withdrawals. This unique feature helps to keep business transactions regularly without any hindrance.
There are many useful features of the current account; the main one is availing overdraft and free cash deposits up to fifty lakh per month. These features help business owners to meet working capital.
The benefits of CA (current account) provides a maximum number of retail banking facilities. There are many types of current accounts like: –
- Standard current account – This account needs to have a minimum average monthly balance. It offers all the facilities of retail banking.
- Group current account- This account comes with perks. Such as medical insurance, medical support, etc.
- Privileged current account – For high net worth individuals, customized support from the bank.
- Foreign exchange account- Accounts with regular transactions to be carried out in foreign currency.
The account holder needs to submit valid KYC documents to open a current account. In recent times, there has been a shift in specific rules in India. There are banks offering interest rates on current accounts too.
Main Differences Between Overdraft and Current Account
- Both the financial instruments have a different meaning. The current account enables the account holder to draw money without prior notice. Whereas, overdraft account is where the bank has ultimate authority, whether to issue overdrawn cash or not.
- The main difference is that for a current account holder, interest will not be paid by the bank. For an overdraft account holder, the bank charges interest daily.
- The overdraft account holder needs to have credibility with the bank; that is, he/she needs to have a proper CIBIL score. For a current account, the holder should be able to maintain an average balance, which is generally in large amounts.
- Overdraft account holders need to repay the loan taken as per bank rules and regulations. Current account holders don’t need to approach a bank for daily transactions, cheque deposits, withdrawals, etc.
- A current account holder can easily avail of bank overdraft facilities. While account holder who availed the Overdraft facility most of the time is not eligible to hold an existing current account. This clause again depends on the credit score of an individual.
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Both current and overdraft commercial facility, have their unique features, and play an essential aspect as financial instruments. The current account is for high-frequency bank transactions, with no restrictions on any withdrawals.
Banks usually pay no interest to these account holders. Whereas, an overdraft facility is given to current account holders to liquidate cash and maintain balances for business purposes.
Word Cloud for Difference Between Overdraft and Current Account
The following is a collection of the most used terms in this article on Overdraft and Current Account. This should help in recalling related terms as used in this article at a later stage for you.