Question

Distinguish between the Cheque & Bank Overdraft.

Answer 1

A cheque, or check, is a document that orders a bank to pay a specific amount of money from a person's account to the person in whose name the cheque has been issued. The person writing the cheque, known as the drawer, has a transaction banking account where their money is held.

Overdrafts
There are several different types of overdrafts but the two most common are standard overdrafts on checking accounts and secured overdraft accounts that loan cash against various financial instruments.

A standard overdraft is the act of withdrawing more funds from an account than the balance would normally permit. If you have $30 in a checking account and withdraw $35 to pay for an item, a bank that permits overdrafts covers the $5 and typically charges you a fee for the service. You are generally charged a separate fee for each purchase in excess of your account balance.

Secured overdrafts act more like a traditional loan. As with a cash credit account, money is lent by a financial institution but a wider range of collateral can be used to secure the credit. For example, you might be allowed to use mutual fund shares, LIC policies or even debentures. There are also clean overdraft accounts, in which no specific collateral is offered but overdrafts are permitted due to the net worth of the individual. Generally speaking, this is only possible when the borrower has a large account at the financial institution and enjoys a long-standing relationship.