Fixed deposits (FDs) are a popular savings tool in India. They offer a secure way to grow your money with guaranteed returns over a fixed period. However, emergencies can arise, requiring immediate access to funds. Consider an overdraft instead of breaking your FD and losing the accrued interest. This option provides liquidity without sacrificing your investment’s benefits.
What is an Overdraft Against Fixed Deposit?
An overdraft against an FD allows you to borrow money using your FD as collateral. Banks and NBFCs offer this facility, enabling you to access funds up to a percentage of your FD’s value. The interest rate on the overdraft is usually lower than personal loans or credit card rates. This makes it a cost-effective solution for urgent financial needs.
How Does Overdraft Against FD Work?
When you opt for an overdraft against your FD, the bank or NBFC grants you a credit limit based on the deposit amount. You can withdraw money as needed, up to this limit. The interest is charged only on the amount withdrawn, not on the entire limit. It is typically 1-2% higher than the FD interest rate.
For example, if you have an FD of ₹1,00,000 at 6% p.a., the bank may offer an overdraft facility up to 90% of the FD value (₹90,000). If you withdraw ₹50,000, you will pay interest on that amount, not on the full ₹90,000.
Benefits of Overdraft Against Fixed Deposit
- Maintains Investment Growth: You continue to earn interest while you use this facility. This means your funds stay intact, and you don’t lose the benefits of compounding interest.
- Lower Interest Rates: Overdrafts against FDs have comparatively lower interest rates. This makes it a cheaper option for accessing funds.
- Flexible Repayment: There is no fixed repayment schedule for an overdraft. You can repay the borrowed amount at your convenience. However, this is provided you stay within the credit limit.
- Easy Approval: Since the FD is collateral, issuers are willing to approve overdrafts. There is minimal documentation involved, making the process hassle-free.
- No Impact on Credit Score: Using an overdraft against your FD does not affect your credit score. This is unlike defaulting on a personal loan or credit card payment.
Disadvantages of Overdraft Against Fixed Deposit
- Interest Accumulation: Despite a lower interest rate, returns can accumulate quickly on non-repayment. This can lead to a higher repayment amount over time.
- Limited Availability: Not all banks and NBFCs offer overdraft facilities against FDs. You need to check with your bank if this option is available.
- Risk of FD Encashment: If you fail to repay the overdraft, the bank has the right to encash your FD to recover dues. This can result in a loss of your savings.
How to Apply for an Overdraft Against FD
Applying for an overdraft against fixed deposit is a straightforward process:
- Visit the Bank or Apply Online: You can apply for it by visiting your bank branch or via online banking. Check if your bank/NBFC offers this service.
- Submit the Application Form: Fill out the application form with the necessary details. These include your FD account number and personal information.
- Provide Necessary Documents: Submit any required documents. These can be identity proof, address proof, and the FD receipt.
- Approval: Once the bank verifies your details, the overdraft limit is sanctioned. However, this is based on the value of your FD. You can then withdraw money up to the approved limit.
Comparing Overdraft Against FD and Breaking the FD
During a financial emergency, you might consider breaking your FD to access funds. However, this can lead to several disadvantages compared to using an overdraft facility:
- Loss of Interest: Breaking an FD before maturity means losing the interest accrued. It also means incurring a penalty. With an overdraft, your FD remains intact and continues to earn interest.
- Penalties and Charges: Premature withdrawal of an FD often comes with penalties and reduced interest rates. An overdraft charges interest only on the amount withdrawn. This is done without affecting the FD’s interest rate.
- Financial Security: Maintaining your FD while using an overdraft ensures you have a financial cushion. Breaking the FD leaves you without this safety net.
Overdraft Against FD vs. Personal Loans
Personal loans are another option for accessing funds during emergencies. However, overdrafts against FDs offer several advantages over a personal loan:
- Lower Interest Rates: Overdrafts against FDs may have lower rates than personal loans. This makes them a more affordable option.
- Collateral-based Approval: Since FDs serve as collateral, banks are willing to approve overdrafts. This can be approved even for individuals with lower credit scores. Personal loans require a thorough credit check and may have stricter eligibility criteria.
- Flexible Repayment Terms: Overdrafts offer more flexible repayment terms. These typically have fixed EMIs and repayment schedules.
Online FD and Overdraft Facility
Many banks and NBFCs now offer online FD options. They allow customers to open and manage their fixed deposits through Internet banking. This also extends to the overdraft facility. Issuers make it easier and more convenient to apply for and use an overdraft against your online FD.
To use this service, log in to your bank’s internet banking portal. You can then navigate to the FD section, and select the overdraft option. Fill in the required details, and the bank will process your application online. This saves time and simplifies the process, especially in urgent situations.
An overdraft against a fixed deposit is a valuable financial tool. It provides liquidity during emergencies without sacrificing the benefits of your investment. It offers low interest rates, flexible repayment, and quick approval. By opting for an overdraft, you can maintain your finances and ensure your investments’ growth. Consider this option the next time you face a financial crunch. Choosing this may be a more prudent and cost-effective solution.