New Delhi. A sudden need for money can happen to anyone, such as a big household expense, medical emergency, children’s fees or any important payment. In such a situation, people often break their fixed deposits (FD), which also results in loss of interest and breaking charges may also be imposed. But do you know that you can arrange instant cash even without breaking the FD? The easiest and smart way to do this is through FD Overdraft (OD) facility, which banks provide very easily.
This facility not only keeps your investment intact, but also protects your pocket from loss by providing funds at low interest rates. Let us understand how it works and why it becomes the best option in case of sudden need for money.
What is FD overdraft?
Overdraft facility means that the bank lends you money up to a certain limit in exchange for your FD. This money is decided on the basis of the value of your FD. Usually it ranges from 70% to 90% of the FD. Meaning, if your FD is worth Rs 2 lakh, then the bank can give you an overdraft of around Rs 1.4 to 1.8 lakh.
Why is overdraft better than breaking FD?
If your FD is broken, your investment stops and there is loss of interest. Many banks also impose penalty. But in overdraft-
- FD remains as it is.
- Keeps earning interest.
- You get instant cash.
- Less interest has to be paid because it is considered a secured loan.
- This means that your FD is also safe and you have got the required money.
How is overdraft interest charged?
The biggest advantage of overdraft facility is that you have to pay interest not on the entire limit, but only on the amount that you have used. For example, if your overdraft limit is Rs 1 lakh and you have withdrawn only Rs 20,000, then interest will be charged only on that Rs 20,000. In most banks the interest rate is just 1–2% more than the interest on FD. This rate is much lower than personal loans, where the interest can range from 12–20%.
FD Overdraft Vs Personal Loan
- Interest rate is low (FD rate + 1-2%) but very high in personal loan (12-20%)
- Documentation is almost not required in FD overdraft but necessary in personal loan.
- The processing time in overdraft is minutes whereas in personal loan it takes several days.
- In overdraft, interest is charged only on the amount utilized but in PL, interest is charged on the entire amount.
Which banks offer this facility?
Almost all major banks like SBI, HDFC Bank, ICICI Bank, Kotak Mahindra, PNB, Bank of Baroda etc. provide FD overdraft facility. This facility can be available on savings FD, term deposit, tax-saver FD and senior citizen FD.
What things should be kept in mind?
- The bank decides the OD limit according to the value of your FD.
- The interest rate may change according to the bank.
- Processing fee may be charged for OD in some banks.
- It is beneficial to return on time.
Frequently Asked Questions (FAQ)
Question- Is taking overdraft on FD the cheapest option?
Answer: Yes, when you need money for a short period of time and can repay soon, this is usually the cheapest option.
Question: Does overdraft against FD affect credit score?
Answer: Generally not, because it is a secured loan and appears differently on the credit report. But it is good to confirm with the bank.
Question- Can an FD be renewed or closed if it is linked to overdraft?
Answer- It can be renewed, but before closing the FD, it is necessary to pay the entire dues of overdraft.
