Difference Between Overdraft and Cheque

What is Overdraft?

Overdraft is an arrangement that banks have with their customers. The bank will lend you more money than you have in your account if it’s charged an interest rate. This interest is usually calculated by the daily average balance (DAB).

 Overdrafts, or overdraft privilege, is a service that allows consumers to borrow money that they don’t have from a bank. The consumer’s bank or lending institution will agree to cover the overdraft if, and only if, the customer agrees to pay back the overdraft fees plus interest.

The overdraft limit is the amount of credit that your bank can provide. It is the maximum amount that your bank can lend you. Your credit history and the available balance in your bank account decide this limit.

You can make payments from your overdraft facility. However, the interest charged on overdrafts is much higher than the bank’s standard interest rates. An overdraft facility can be availed of on payment of a fee.

Suppose you operate a current account and are willing to pay the interest and fees for an overdraft. In that case, it is an excellent way of meeting emergencies and embarrassing insufficient funds.

What is Cheque?

A cheque is an order from a bank to pay a certain amount of money or goods to a specified person. This payment order is given to a financial institution (usually a bank), which then pays the amount requested.

The cheque is one of the oldest forms of payment. With the rise of electronic payments, cheques have been pushed to the sidelines, but they still have an important place.

This payment method is still preferred; for example, consumers use cheques in the UK and US. Despite the appearance of paperless and card payments, quite a several Britons still like to handwrite their cheque, while others still pay in cash.

This is how a cheque payment works. First, the cheque is signed by its drawer and placed in an envelope given to the person to be paid. Then, the payee takes it to his bank, which pays him the amount written on it.

Many people still use cheques to pay, and with good reason. If paying with cash is inconvenient, cheques provide a safe, secure payment. And the card and electronic payments aside, cheques are the only reliable and safe way to make huge payments.

Difference Between Overdraft and Cheque

Overdrafts are a lending product offered by banks to their current account holders. They allow them to spend more money than they have in their bank account.

Banks levy an overdraft fee for this facility. This is charged as a percentage of the amount withdrawn.

A cheque is a means of payment to those you owe or for making purchases, especially if they require significant amounts. It is an excellent alternative to carrying large amounts of money around.

Comparison Between Overdraft and Cheque

Parameter of ComparisonOverdraftCheque
FeesThere is an interest charged.There is no fee.
PurposeIt helps make immediate payments.It is offered to help the bank customer securely meet his payment obligations.
AvailabilityThe facility is only accessible to current account holders.Cheques can be used by any interested account holder, even those without a current account.
DefinitionIt is a bank service that allows current account holders to pay more money than they have in their accounts.It is an order by an account holder to his bank to pay the person they have named a specified amount.
BalanceOnly given according to available balance.It is allowed beyond the available balance.

References

  1. https://www.tandfonline.com/doi/abs/10.2753/JEI0021-3624450212