One of the most popular types of investments is a fixed deposit (FD) since it can take care of short- and long-term financial goals. If there is a sudden requirement for cash, you can prematurely take your FD money as an overdraft on FD. You must, however, pay a fine in order to achieve that. For an FD overdraft, your fixed deposit investment is used as security, and you are then provided with the funds as an overdraft (OD).
FD Overdraft: How is it Beneficial?
Your FD is used as collateral under the OD feature in accordance with the terms and conditions set forth by the bank. Banks normally permit an FD overdraft of up to 90% of the value of the primary FD, with interest rates on the OD facility being 1% to 2% higher than those on the underlying FD. For instance, if your FD earns 5% annually, your OD will make 6-7%.
You will receive the requested overdraft on the FD amount if the bank accepts an overdraft account, exactly like you would with a bank loan. You can withdraw money from your checking account and put it in overdraft if authorised for the overdraft facility. A fixed amount of money can be taken out of your account. The balance in your bank account increases when you utilise the overdraft option; when you deposit money, the balance decreases. Your bank will charge you interest from when you borrowed money until you pay it back. You can pay back an overdraft to the lender in whole or in part whenever you wish to do so. When you have money after paying, you can withdraw it whenever you need to equal the overdraft limit.
A borrower using an overdraft facility through his or her bank account is not subject to any security by the bank. On the other hand, a secured overdraft is one that the borrower earns by pledging assets as collateral. These assets consist of the funds in your bank account, your house, your automobile, your fixed deposits (FDs), your stocks, your bonds, and so forth. When learning about what is overdraft against FD, it’s important to remember that the type of collateral affects the interest rates and overdraft restrictions. Daily interest is assessed since the overdraft balance is not returned in accordance with the established timeline.
Simply making a deposit lowers your outstanding sum, which lowers your overdraft limit. The interest on the loaned amount must be calculated daily because the borrowed amount’s ledger can vary daily.
Eligibility for an OD Against FD
- All holders of fixed deposits, whether individual or joint accounts, are eligible for loans against their deposits.
- The feature does not take FD in a minor’s name.
- A 5-year tax-free FD holder cannot apply for this loan.
What is Overdraft Against FD: Characteristics of FD OD
- Overdraft: If the credit limit is reached, an overdraft is authorised. The limit may vary depending on the borrower.
- Interest Rate: The interest rate is based on the overdraft amount. Daily calculations lead to monthly billing to the account. If you don’t pay the overdraft in full by the due date, the interest will be added to the principal at the end of the month, and interest will be calculated on the higher principal.
- Prepayment penalties: You typically have to pay a penalty when you want to pay off a loan early. When you pay off an overdraft, there are no early withdrawal fees. You can pay back the loan in installments.
- EMIs are not a form of repayment: Repay the overdraft when you have the money available. The overdraft amount is not subject to repayment requirements similar to those for loans. The use of Equated Monthly Instalments (EMIs) is not expected of you. You are free to make payments whenever you choose and in whatever amount. You must, however, abide by the lender’s request if they make one for repayment.
- Overdrafts allow dual borrowers: When you jointly apply for an overdraft, both of you are accountable for the full loan amount. Regardless of the overdraft amount that either applicant borrows, both are liable for timely repayment of the overdraft facility. The other borrower will be responsible for paying the entire balance if one of the borrowers defaults or cannot make payments. In such a situation, all of the borrowers’ collaterals are in danger if a default occurs, regardless of the joint borrowers’ overdraft share.
While understanding what is overdraft against FD, it is also important to note that your account might not inevitably go into overdraft when you render a cheque. Instead of going into overdraft, your cheque can be rejected, in which case a fine will be assessed.
Credit Card Against FD
Fixed deposits also allow investors to use credit cards against their balances, in addition to the benefits of variable term avenues, income tax savings, liquidity, assured returns, and loan alternatives. With a credit limit of 75% to 85% of the value of your fixed deposit, a credit card against an FD overdraft is a secured credit option that is issued against your fixed deposit.
As already stated, an FD overdraft is nothing more than a revolving short-term credit facility. If you need money to pay bills, use this option, and pay them off as quickly as possible to avoid accruing interest. Make sure to go through your bank’s overdraft prerequisites before applying for the same.
Overdraft Against FD FAQs
Is an overdraft short-term?
What is the benefit of FD overdraft?
What happens to my OD if I want to pre-close my FD?
An FD carefully considers the conditions and circumstances of your bank before pre-closing. Some banks additionally permit you to withdraw a portion of your FD amount rather than the entire investment.