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Difference Between Overdraft and Loan

Published on Friday, August 25, 2017
When a customer wants to borrow money from the bank, a customer can avail the facility of an overdraft or loan in need.


  • An overdraft is one kind of facility provided by the banks to its customer. 
  • In an overdraft facility, a bank has permitted to withdraw the money to do the transactions. 
  • When the balance of an account holder goes below zero, a customer can use this facility. 
  • An overdraft limit is drawn by the bank it means a bank decides up to which limit an amount to give as an overdraft. 
  • In overdraft, a time limit by which an amount must be debited to the bank and that is also decided by the bank. 
  • To avail an overdraft facility, the client must have a current account in the bank. 
  • An overdraft facility depends on the customer's credit, eligibility and transactions a bank charges an interest on that. 
  • When the negative balance exceeds the agreed conditions, a higher rate of interest is applied. 


  • A Loan is a money which can be borrowed from a bank or any financial institutions. 
  • So, a loan is fixed amount of credit given to the client by the bank for a pre-determined period. 
  • A loan is always for some specific amount, time and for a specific interest rate. 
  • A loan is repaid in instalments along with the interest applicable in a future. 
  • If a customer fulfils the eligibility criteria then only a loan will pass. 
  • A loan is given against some security provided by the customer to the bank, a security may be a property, gold, etc. 
  • If in case a creditor fails to pay the money a debtor can use this security to cover the loan amount. 
  • A loan is a lending of money by the bank to an individual or an entity. 
  • A loan is one kind of debt given to the customer for a certain period of time. 
  • A loan is an agreement between the bank and a customer to repay it in future

Difference Between Overdraft and Loan

An overdraft occurs when money is withdrawn from a bank account and the available balance goes below zero.
So, a loan is fixed amount of credit given to the client by the bank for a pre-determined period.
An overdraft facility is provided by the banks.
A loan is borrowed by the customer from the bank.
An overdraft is for a short period of time.
A loan is for a longer period of time.
An overdraft facility is generally used by the company to run their day to day transactions.
A loan is borrowed by both an individual and business entity also for long term purpose.
An interest is just charged on the amount overdrawn.
In a loan, an interest is charged on the whole amount.
In overdraft, an interest is payable by depositing money in bank account.
In a loan, a repayment is done by EMIs.
An interest is calculated on a daily basis.
An interest is calculated on monthly basis.

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Ramandeep Singh is a seasoned educator and banking exam expert at BankExamsToday. With a passion for simplifying complex concepts, he has been instrumental in helping numerous aspirants achieve their banking career goals. His expertise and dedication make him a trusted guide in the journey to banking success.

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