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.
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.
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.
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.