Question

Explain the following term/concept.

Overdraft

Answer 1

1. A company having a current account with a bank is allowed an overdraft facility.
2. Under an overdraft facility, the bank allows its customer to overdraw an amount up to a particular limit, i.e. to withdraw more than the credit balance amount in his current account.
3. Repayments can be made whenever required during the time period. 
4. The interest is determined based on the actual amount withdrawn. Generally, the bank charges a low-interest rate, and collateral securities are usually accepted for an overdraft facility.