To remove the confusion regarding these terms we are sharing proper definitions in an easy way to understand the concept. Basically, the concept is quite simple but due to the use of different terms people fail to understand the actual concept.
Overdrawn account Or Overdraft
When any person withdraws all the money from the account and the remaining balance is zero then this account said to be Overdraft or Overdrawn Account.
Many people ask a question on google that what is an overdraft facility. So here we answer that question that Overdraft Facility provided by the bank to its customer. Overdraft facility is the loan type provided by the bank or non-bank financial institute.
That loan can be borrowed by the user for a limited time. The interest rate for the Overdraft facility is up to 12 % per anum. to repay that loan the required time is 1 year.
When the balance of the customer becomes zero then the bank provides the credit extended up to the specified limit. This provided limit by the bank is called the overdraft limit or overdraft protection.
Bank Overdraft Advantages and Disadvantages
You must know about the advantages and disadvantages of the bank overdraft before you get that facility from the bank. After that, you can use this effectively.
The overdraft facility allows the users to withdraw the money from their account when they have no money in their account. Users can draw a limited amount. this limit assigned by the bank on the basis of the working capital, creditworthiness, and the security offered by the borrower.
It helps to keep a good record of the customer. Less paperwork required by the customer to get this loan. if you repay this then less interest rate you pay in order to maintain your good track record.
The disadvantages in overdraft amount are that the bank may reduce the limit. After getting the overdraft facility customer it is very difficult for the customer to repay the higher interest rate with the original price.
So if the customer cannot repay the amount the interest rate increase in a great amount which is not good for the customer.