Difference Between Overdraft And Loan

Difference Between Overdraft And Loan

The major dissimilarities or difference between overdraft and loan can be highlighted as follows:

1. Introduction

Overdraft: A borrowing facility provided by the bank under which an account holder can withdraw excess amount of money than the actual balance.

Loan: Fixed amount of money borrowed from financial institutions for specific period of time.

2. Type Of Borrowing

Overdraft: Short term borrowing

Loan: Long term borrowing

3. Refers To

Overdraft: It is only a credit facility

Loan: It is a financing facility (borrowed capital) provided by the financial institution

4. Interest Calculation

Overdraft: On daily basis for overdrawn amount of money

Loan: On monthly basis for entire amount of loan

5. Rate Of Interest

Overdraft: Higher rate

Loan: Lower rate

6. Requirement Of Bank Account 

Overdraft: Bank account is required to enjoy this facility

Loan: Bank account is not compulsory for loan

7. Payment Option

Overdraft: Lump sum amount should be paid

Loan: It is paid on installments basis

8. Purpose

Overdraft: It is borrowed to fulfill short term and day-to-day business requirements like wages payment, purchase of raw materials, operating expenses etc.

Loan: It is borrowed to fulfill long term financial requirements like business setup, buying equipment and other fixed assets etc.

   Also Read: 

Difference Between Loan And Advance

9. Flexibility

Overdraft: It is more flexible by nature

Loan : It is less flexible in nature

10. Process

Overdraft: It is simple, easy and fast process of borrowing capital.

Loan: It is complex and time consuming process of borrowing capital

11. Collateral/Security

Overdraft: Not required for overdraft

Loan: Required to get loan from banks

Overdraft Vs Loan (Comparison Chart)

Basis For Difference	Overdraft	Loan
Introduction	Short term borrowing facility provided by the bank to the account holder for short period	Money borrowed from the bank for specific period of time
Borrowing Type	Short-term	Long-term
Refers To	Credit facility	Financing facility
Interest Calculation	Daily basis	Monthly basis
Interest Rate	Higher	Lower
Bank Account	Required	Not required
Payment Option	Lump sum	Installment
Purpose/Objective	To meet day-to-day financial needs	To fulfill ling-term financial obligations
Flexibility	More	Less
Process	Simple and short	Complex and lengthy
Collateral/Security	Not required	Required

I hope this post is helpful to understand the difference between overdraft and loan and to make comparison between them.