The differences between overdrafts and loans are summarized in the following table:

5. 

Bank overdraft	Bank loan
1. Customer must have current account. He is allowed to overdraft his account up to a certain amount for an agreed period. The amount of debit balance outstanding is the amount of the overdraft taken.	1. Borrowers need not have a current. If he has a current account, then his account is credited with the agreed amount of the loan for an agreed period of time, while a special loan account is debited with the same amount.
2. Less formalities are observed as borrower need not fill in forms whenever he wants credit. Being already a customer of the bank, the borrower need not have reference as to his financial standing. Security is unnecessary if he amount of overdraft required is small.	2. The borrower has to go through the formal procedure of applying for loan. If he is not a customer of the bank, he needs references. The bank must be satisfied with the borrower’s financial position, security on the loan and the purpose of the loan.
3. Interest is charged on the actual amount and the number of the days the account is overdrawn, e.g. if the account is overdrawn by $2,000 for 100 days and the interest rate is 10% per annum then the interest charged = 10/100 ´ $2000 ´ 100/365 = $54.79 Total amount payable at the end of 100 days =$2000 + 54.79 = $2054.79	3. Interest is charged on the whole amount borrowed for the full period of the loan irrespective of whether the loan is fully used or not. For example, for a loan of $2,000 for a year at 8% per annum, interest charged for the year = 8/100 ´ $2000 =$160 Toal amount payable at the year =$ 2,000 + $160 =$2,160
4. Any money paid into the customer’s account reduce the overdraft, e.g. a customer overdraws his account by $2000 on 1 January and pays into his account $1,000 on 30 June and another $1000 on 31 December. No other withdrawals or payments are made into his account during the year. The rate of interest on the overdraft is 11% per annum. Interest payable = Amount standing to his debts ´ rate of interest ´ Period the outstanding amount is overdrawn Interest payable up to 30 June =$2000 ´ 11/100 ´ ½ =$110 Interest payable up to 31 December = $ 1,000 ´ 11/100 ´ ½ =$ 55 Total amount of interest payable for the year =$110 + $55 = $165. Interest payable for overdraft is $165 while the interest payable on the bank loan for the same amount and the same period is $150. This is because the rate of interest charged on a bank overdraft is higher than for a bank loan. ( In practice, interest on overdraft is calculated on a monthly basis, hence increasing the total debit balance by the amount of the added interest payable. So in actual fact the customer will have to pay a large interest than that calculated above.)	4. Money paid into the borrower’s account doesn’t reduce his debts. However, when the loan is repaid periodically under standing orders, interest is payable on the reduced amounts standing to the debit of the loan account. For example, a borrower takes a bank loan of $2000 on 1 January at an interest rate of 10% per annum. The loan is to be repaid in two half-yearly instalments. Amount payable per period = Instalment + interest payable where (i) Instalment  = Loan/ No. of instalments (ii) Interest payable = Interest rate per annum ´ instalment period ´ Amount outstanding (Amount outstanding = Loan – Instalment paid to date) 30 June : 1st instalment Amount payable = $ 1000 + [10/100 ´ ½ ´ $2000] =$1000 + $100 =$1100 31 December : 2nd instalment Amount payable = $1000 + [ 10/100 ´ ½ ´ $1000] = $1000 + $50 = $1050 Total amount paid by the end of the year =$ 1100 + $1050 = $2150 ( If repayment is not made periodically, total amount payable at the end of the year = $2000 + [10/100 ´ $2000] = $2000 + $200 = $2200 The borrower saves $50 ($2200 - $2150) if he pays by instalments.
5. As the banker doesn’t know when and how much of the agreed amount he would be called upon to provide for the customer, he charges a higher rate of interest because of this element of uncertainty.	5. Since the banker is certain as to the amount of the loan demanded, he charges a lower rate of interest.
6. An overdraft is suitable for the customer who is unsure to how much, when and for how long he needs credit, e.g. loans for business purpose like the purchase of goods for sale.	6.This is suitable for the borrower who is sure that he will require the loan for a certain time, e.g. loans for personal purposes like the purchase of household equipment and cars, or for business purpose like the purchase of fixed assets.