Difference Between Overdraft and Current Account

Overdraft and current account are two separate banking terms. Banks maintain both statements for the convenience of customers.

One can withdraw money at their convenience through a current account, whereas an Overdraft enables the customer to remove more than the funds available.

Key Takeaways

1. Overdraft is a credit facility allowing a current account holder to withdraw more money than is available up to a pre-approved limit. In contrast, a current account is a bank account used for day-to-day transactions.
2. Overdrafts typically come with high-interest rates and fees, while current accounts may have lower fees and interest rates.
3. Overdrafts and current accounts are used for managing money and transactions, but overdrafts provide short-term credit.

Overdraft vs Current Account

A person can withdraw money from an overdraft account even if their balance is nil. It can be a type of loan which the person has to pay or return within a given time period. A person can withdraw money from a current account at any time. An ATM can also be used to withdraw money. Current accounts can be of different types.

An overdraft is issued by the bank when the account balance is low or zero. Overdraft enables the customer to have less financial burden.

The current account gives easy access to the money in the bank account. Usually, cash in the existing version doesn’t accumulate interest.

This enables the customer to withdraw as much money as possible. This account is often used for business purposes.

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Comparison Table

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 customers to draw money anytime, providing enough individual funds.
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 the current operational account can withdraw up to fifty thousand INR in cash in a week.	The funds can be withdrawn anytime from the bank or other facilities like ATMs. There is no specific limit assigned for transactions.
Beneficiaries	Useful for individuals and small-scale businesses. For maintenance of enough cash flow.	Useful for large-scale businesses and individuals with hefty funds. They are established to carry out day-to-day transactions easily.
Retail banking -offers	No retail banking offers are given to overdraft customers. These accounts are like small-term loans provided for maintenance.	This account offers chequebooks, debit cards, internet banking facilities, and, most importantly, an overdraft facility.

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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.

Depending on their credit rating and relationship with a particular bank, these overdraft accounts are issued to each account holder. 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 accounts which are as follows-

1. Overdraft issued against salary accounts and savings accounts.
2. It’s a type of short-term loan, which is to pay within a specified time frame.
3. Overdraft entices an individual interest from the use time; the time limit can be from a few days to a few weeks.
4. In this account, the whole authority is of the particular bank.
5. Current account holders can also apply for an overdraft account.

This account helps for a responsible cash flow to meet working capital. So, most 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 is credited timely to avail of Overdraft on the salary account.

The interest on Overdraft is calculated at the rate negotiated between the bank and account holder in the document signed—the interest is calculated daily. For example, if the OD (Overdraft) interest rate is 10% per annum, then the calculations are based on the daily outstanding balance.

 

What is Current Account?

This financial account is one type of deposit account upheld by individuals who must carry out large transactions with the respective bank daily.

The 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 regular without any hindrance.

The current account has many valuable features; the main one is availing overdraft and free cash deposits of up to fifty lacks 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: –

1. A standard current account needs to have a minimum average monthly balance. It offers all the facilities of retail banking.
2. Group current account comes with perks like medical insurance, medical support, etc.
3. Privileged current account – For high net worth individuals, customized support from the bank.
4. Foreign exchange account- Accounts with regular transactions to be carried out in foreign currency.

The account holder must submit valid KYC documents to open a current account. Recently, there has been a shift in specific rules in India.

There are banks offering interest rates on current accounts too.

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Main Differences Between Overdraft and Current Account

1. Both financial instruments have different meanings. The current account enables the account holder to draw money without prior notice. At the same time, an overdraft account is where the bank has ultimate authority over whether to issue overdrawn cash.
2. The main difference is that the bank will not pay interest to a current account holder. For an overdraft account holder, the bank charges interest daily.
3. The overdraft account holder needs credibility with the bank; that is, they must have a valid CIBIL score. For a current account, the holder should be able to maintain an average balance, generally in large amounts.
4. Overdraft account holders must repay the loan taken per bank rules and regulations. Current account holders don’t need to approach a bank for daily transactions, cheque deposits, withdrawals, etc.
5. A current account holder can easily avail of bank overdraft facilities. While account holder who availed of 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.

References

1. https://www.nber.org/papers/w17028.pdf
2. https://heinonline.org/hol-cgi-bin/get_pdf.cgi?handle=hein.journals/fedred81&section=193
3. https://www8.gsb.columbia.edu/programs/sites/programs/files/images/Paper1_XiaoLiu.pdf