Overdraft Against FD

Taking an overdraft against FD is considered to be one of the quickest methods to borrow funds from the bank. A fixed deposit overdraft can be beneficial for someone who is in urgent need of funds due to its zero processing fees.

Banks generally allow overdrafts of up to 90% of the existing FD value, with interest on the overdraft (OD) facility being 1-2% higher than the interest on the underlying Fixed Deposit (FD). For example, if your FD earns 6% per year, the OD will earn 7-8% per year.

How Does Overdraft Against FD Work?

If the bank approves an overdraft account, you will get the desired overdraft amount, just like a loan. If you have been pre-approved for the overdraft facility, you can withdraw cash from your bank account, and it will be placed in overdraft. However, you can withdraw money from your account up to a certain limit.

The below points explain how an overdraft works against an FD:

Using an Overdraft

• When you use the overdraft facility, you basically boost the balance on your bank account - when you deposit funds, the balance lowers.
• Your bank will charge you interest from the time you borrowed until you repay. 

Repaying an Overdraft 

• You can repay the overdraft in full or by making partial payments anytime.
• Once you repay the overdraft, you can use it again up to your limit.

Secured vs Unsecured Overdraft

If the borrower takes out an overdraft using his or her assets as collateral, it is considered a secured overdraft. These assets include monies in your account as well as your home, insurance policies, fixed deposits (FDs), shares, bonds, and so on.

An unsecured overdraft doesn't require collateral, such as a house or car. However, the interest rates and overdraft limits vary depending on the collateral. 

Interest on Overdraft

Interest on overdrafts is charged daily because there is no specified timetable, and one can repay the overdraft at any time without notifying the bank beforehand.

Simply depositing money into your bank account reduces your outstanding balance, thereby lowering your overdraft amount. Also, the borrowed amount can change daily, so the interest related to the borrowed amount must be calculated daily. 

As previously stated, an overdraft facility is like a short-term loan. Hence, one must use it only for temporary needs and repay it quickly to avoid high-interest charges.

Eligibility for an OD Against FD

One must meet the following eligibility criteria to take an OD against FD:

• An overdraft against fixed deposits is available to all fixed deposit holders, whether individual or joint accounts.
• This facility does not accept FD in the name of a minor.
• This loan is not available to holders of a 5-year tax-free FD.

Advantages of Overdraft Against FD

Here are the several benefits of taking an overdraft against FD:

• Lower Interest Rates: Generally, the interest rate on an overdraft against an FD is lower than that on personal loans. This is because the FD serves as collateral, and therefore, banks tend to offer lower interest rates.
• No Prepayment Penalties: When you want to pay off a loan early, you normally have to pay the penalty. But in case of an overdraft, you do not have to pay any prepayment penalties.
• Repayment Flexibility: Unlike a loan, an overdraft has no fixed repayment schedule. You can repay the borrowed amount at your convenience. You are not required to pay in Equated Monthly Instalments (EMIs). However, if the lender requests repayment, you must comply with that request.
• Earn FD benefits: Your FD keeps on earning interest even while you use the overdraft facility, maximising the potential return.

Things to Consider for Overdraft Against FD 

Here are a few considerations before taking an OD against FD:

• Interest Rate: The interest rate is calculated daily based on the amount of the overdraft and billed to the account at the end of the month. If you fail to pay the overdraft on time, the interest amount will be added to the principal amount.
• Overdraft Limit: Overdrafts have no minimum monthly payments; however, the amount you owe must be within the overdraft limit. Overdraft repayment should be made as soon as possible because it affects your credit score.

• Overdrafts allow dual borrowers: If you take out an overdraft jointly, you and your joint applicant are both responsible for the total loan. Regardless of the percentage of the overdraft borrowed, both applicants will be responsible for the timely payment of the overdraft facility. It means that if one of the borrowers cannot pay/defaults, the other borrower must pay the entire amount. In such a circumstance, regardless of the overdraft share of joint borrowers, if a default happens, all collaterals of the borrowers are at risk.
• Please keep in mind that when you write a cheque, your account may not automatically go into overdraft. There is a chance that your cheque will be dishonoured instead of going into overdraft, in which case you will be charged a dishonour fee.

Credit Card Against FD

Aside from guaranteed returns, variable tenure options, liquidity, income tax savings, and loan alternatives, fixed deposits offer another benefit to investors: credit cards against FDs. A credit card against an FD is a secured credit option offered against your fixed deposit and has a credit limit of 75% to 85% of the FD value.