Difference between Loan and Overdraft

Loan and overdraft are the terms which are used in the context of banking where bank lend money to borrower at specified rate of interest. However there are many differences between loan and overdraft, let’s look at some of them –

  1. Loan refers to long term debt given by the bank to the borrower whereas overdraft refers to short term facility given by the bank to the account holder to withdraw money from his or her account up to certain limit fixed by the bank.
  2. While loan is a long term arrangement between bank and the borrower and period of loan is between 3 years to 25 years whereas overdraft is usually for short period of time as agreed by the bank and borrower.
  3. In case of loan interest is charged on whole amount of loan whereas in case of overdraft interest is charged only on the amount overdrawn and not on total limit of overdraft.
  4. Bank loan is shown on the balance sheet as a long-term liability whereas overdraft is shown as short term liability in the balance sheet of the company.
  5. Loan involves lot of formalities and documentation whereas in case of overdraft it is flexible and also it requires less formalities and documentation as compared to loan.
  6. Loan is taken when one requires lot of money like housing loan, car loan, education loan whereas overdraft is taken for small amount of money so as to meet day to day shortage of money; overdraft is generally taken by current account holders of bank.
  7. While loan is repaid in equated monthly installments whereas overdraft can be paid in lump sum at any time whenever one has excess money.

As one can see from above that there are many differences between loan and overdraft and a person should know the above differences before approaching to bank for borrowing.

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