Overdraft Against FD

One of the quickest methods to borrow from the bank is to take out an overdraft (OD) against an FD. According to the terms and circumstances of the bank, your FD is utilized as collateral under the OD facility.

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

Overdraft Against FD

If the bank approves an overdraft account, you will get the desired overdraft amount, just as you would a loan from the bank. 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. You can withdraw money from your account up to a certain limit.

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. In an overdraft, you can return to the lender in full or in part whenever you wish. After repaying, anytime you have money, you can take money from your account as needed until the overdraft limit is met. The bank does not have security against an overdraft facility used by a borrower through his or her bank account.

However, 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.

It's also worth noting that interest rates and overdraft limits vary depending on the collateral. Because the overdraft amount is not repaid according to a specified timetable, interest is charged daily. The borrowed money can be reimbursed without the borrower's previous notification.

Simply depositing money into your bank account reduces your outstanding balance, lowering your overdraft amount. Because the borrowed amount ledger can change on a daily basis, the interest related to the borrowed amount must be calculated daily. As previously stated, an overdraft facility is just a revolving short-tenure credit facility. Utilize this function if you require funds to meet financial obligations and repay them as soon as possible so that your interest payments do not pile up.

Eligibility for an OD Against FD

  • Loans against fixed deposits are 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.
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Characteristics of FD OD

  • Overdraft: An overdraft is granted if the credit limit is exceeded. Each borrower may have a different limit.
  • Interest Rate: The interest rate is calculated based on the amount of the overdraft. It is calculated daily 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 at the closure of the month, and interest will be computed on the increased principal.
  • Prepayment penalties: When you want to pay off a loan early, you normally have to pay the penalty. When you repay an overdraft, you do not have to pay any prepayment penalties. You also do not have to return the Overdraft in EMIs. You can repay the loan in installments.
  • EMIs are not used for repayment: When you have the funds, repay the overdraft. You are not required to return the overdraft amount in the same way that you would a loan. You are not required to pay in Equated Monthly Instalments (EMIs). You can repay any amount you want, whenever you want. However, if the lender requests repayment, you must comply with that request.
  • 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 FD. A credit card against an FD is a secured credit option that is offered against your fixed deposit and has a credit limit of 75% to 85% of the FD value.

FAQs

Q1. What happens to my OD if I want to pre-close my FD?

If your money requirement is greater and you are unaware or unsure when you will be able to overcome the liquidity bottleneck, you may consider pre-closing your existing FD. However, before closing your FD, be aware of the penalty charges imposed by your bank. Penalty penalties range between 0.5% and 1% and are deducted from the effective interest rate on the FD at the time of the early withdrawal.

Before pre-closing, an FD carefully calculates the terms and circumstances of your bank. Some banks also allow you to take a portion of your FD balance without having to liquidate the full investment.

Pre-closing a Fixed Deposit could be utilized as a last resort to overcome a liquidity shortage during an emergency, and it may be a better option than taking out a loan, which may incur higher interest rates and processing fees, as well as a longer processing time.

Q2. Is an overdraft short-term?

An OD versus FD can be used on a regular basis to address a short-term liquidity requirement.

Q3. What is the benefit of an OD against my fixed deposit?

The benefit of taking an OD instead of a Fixed Deposit is that you will only be paying interest on the amount you use from the Overdraft, and the interest is calculated daily.

Q4. Can I also get a loan against my FD?

Yes, your FD can be used to get a loan.

Q5. Will my FD be used as collateral for an overdraft?

Yes, the FD will be used as collateral.

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