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Overdraft and cash credit are forms of borrowing. With both, the lending institution lets the borrower withdraw funds she has no claim to, usually in small amounts. But there are differences between the two.

Cash credits are more common for businesses than individuals. They require a security to be offered as collateral in exchange for cash. The security can be stock, raw materials, or some other tangible asset. The account’s credit limit is usually a percentage of the security’s value.

A standard overdraft, familiar to most checking-account holders, occurs when funds in excess of an account’s balance are withdrawn. If a checking account has $30 and its owner takes out $35, a bank that permits overdrafts will spot him the $5 and then charge a fee for the service. Each excessive withdrawal is charged a separate fee.

Overdraft accounts act more like a traditional loan. A financial institution loans money like it would on a cash credit account, but it accepts a wider range of collateral to secure the credit. Mutual funds shares or debenture are examples of collateral that might be used.

Clean overdraft accounts grant loans against the borrower’s worth. They usually work only when the borrower has a lot of funds parked at the financial institution.

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