Overdraft and Cash Credit Interest Calculator
A term loan charges interest on the whole amount from day one. A running limit charges only for what you draw, on the days you draw it. That difference is worth real money, and this shows you exactly how much at your own utilisation.
Your running limit
The term loan you are comparing it against
At 45% utilisation your limit costs Rs.1,46,500 a year against Rs.2,73,333for a term loan of the same size. You are drawing Rs.9,00,000 on average, so the limit is effectively costing you 16.3% on the money you actually use.
The crossover is at 92% utilisation. Below that the running limit wins because you pay only for what you draw. Above it, the term loan wins because you are using nearly the whole limit anyway and the lower term rate stops being offset by the flexibility.
Annual cost against utilisation
The flat line is the term loan. It costs the same whether the money is working or sitting idle.
KarobarUdhar Insider Tip
Interest on a cash credit or overdraft account is charged on the daily closing balance. That makes the account itself a savings instrument. Parking a receivable collection in the limit account for four days before paying a supplier directly reduces the interest you pay, with no paperwork and no permission needed. On a Rs.20,00,000 limit at 14%, keeping an extra Rs.1 lakh parked for a fortnight each month saves roughly Rs.6,444 over a year.
KarobarUdhar Insider Tip
A cash credit limit is linked to drawing power, which is recomputed from the stock and receivable statement you submit each month. Miss the statement and the bank may freeze the limit to the last reported drawing power, or in some cases to nil, regardless of your sanctioned amount. Businesses discover this in the week they most need the money. Put the monthly statement on a calendar reminder.
Indicative only. Term loan interest here is approximated on the full sanctioned principal for a single year, which is a deliberately generous treatment of the term loan and understates the running limit's advantage at low utilisation. Actual cash credit costs depend on your daily balance pattern, drawing power, and your bank's charge schedule.
Why the headline rate is the wrong comparison
A term loan at 13 percent looks cheaper than a cash credit limit at 14 percent, and for a business that draws its full limit and keeps it drawn, it is. For a business whose need rises before a season and falls after it, the comparison inverts, because the term loan charges you for money that is sitting idle in your current account while the limit charges nothing for the same idle capacity beyond a commitment fee.
The calculator above solves for your crossover: the utilisation level at which the two cost the same. Below it, the flexibility of the limit is free and then some. Above it, you are effectively holding a term loan with extra paperwork and paying a higher rate for the privilege.
One caution on how this is computed. The term loan side spreads its processing fee across the tenure rather than charging all of it against the first year. Loading a one-off fee entirely into year one makes the term loan look worse than it is, and would show the running limit winning at every utilisation level, which is not true.
How to use it
- Enter your sanctioned limit and average utilisation. Utilisation is the average across the year, not your peak. Take it from twelve months of statements if you are unsure.
- Add the commitment charge if your bank levies one. Check your sanction letter. Many banks do not charge it on smaller limits, in which case leave it at zero.
- Include annual renewal charges. Working capital limits are renewed yearly and the renewal carries a fee. It is frequently left out of cost comparisons.
- Read the crossover, not just the totals. The crossover tells you the utilisation level at which your answer flips. If your usage is near it, small changes in your cycle will change which facility is right.
Common questions
How is interest on a cash credit account calculated?
On the daily closing balance, compounded monthly. You are charged only for what you have actually drawn, on the days you have drawn it. This is the fundamental difference from a term loan, where interest runs on the full sanctioned amount from disbursal regardless of whether the money is working.
What is a commitment charge?
A fee some lenders levy on the unused portion of a sanctioned limit, typically a fraction of a percent a year. It exists because the bank has set capital aside against your limit whether or not you use it. Where it applies, a large limit you barely draw on is not free.
At what utilisation does a term loan become cheaper?
It depends entirely on the gap between your cash credit rate and your term loan rate, plus the commitment charge and renewal fees. Enter your own numbers and the calculator solves for your crossover. In many cases the crossover sits high, above 80 percent, which means the running limit wins for most businesses with fluctuating needs.
What is drawing power and why can my limit be frozen?
Drawing power is the amount you may actually draw, recomputed each month from the stock and receivable statement you submit. It is usually your sanctioned limit or your eligible security value, whichever is lower. Miss the monthly statement and the bank may hold you to the last reported figure, or in some cases to nil, no matter what your sanction letter says.
Can I park surplus cash in my cash credit account?
Yes, and you should. Because interest accrues on the daily outstanding, money sitting in the limit account directly reduces the balance you pay interest on. Routing collections through the limit account rather than a separate current account is one of the few genuinely free savings available to a business.