Overdraft Against Fixed Deposit (FD)

Overdraft against fixed deposit is a facility where an FD account holder can avail of an overdraft of up to 90% of the value of the FD. The interest rates for OD against FDs are generally 1-2% more than the interest rates on the  FD. You can cover up your expenses with an overdraft facility while still earning on your FD. This makes overdraft against FD one of the lowest interest rate loan options compared to others.

Fixed deposits are one of the most popular investment options in India. FDs allow you to invest your money in a bank for a fixed period to earn a fixed interest. One of the significant reasons for the popularity of FDs could be the low risk. FDs offer profit only through fixed interest and have no market linkage.

But one major drawback many people point out about FDs is the lock-in period. You can only withdraw the fund after the lock-in period. If you had to withdraw before maturity, you might have to pay the penalty, or a lower interest rate will be applicable.

However, when you require funds in an emergency, you can avail an overdraft against your Fixed Deposit. Typically, financial institutions allow overdrafts up to 90% of the FD value. This limit varies in each institution. Moreover, interest on OD against FD is only 1-2% above the FD interest rate. For instance, if your FD interest rate is 5%, the overdraft will attract interest at 6-7% p.a.

One of the most significant advantages of OD against FD is that banks will charge interest only on the funds utilised. Suppose you are securing an OD of Rs. 2 lakh but withdrawing Rs. 10,000 for 10 days. After using the money for 10 days, deposit it back into the account. In this case, only the sum withdrawn, i.e. Rs. 10,000, attracts interest for 10 days, while the remaining Rs. 90,000 remain as is.

You can avail of an OD against FD only if you hold a fixed deposit with a bank or financial institution. This FD account can be held individually or jointly with someone. The below categories of depositors are eligible for an OD against a fixed deposit:

• Any Indian resident or NRI aged 18 and above.
• Hindu Undivided Families (HUF).
• Trusts.
• Corporations.
• Companies.
• Clubs.
• Societies.
• Associations.
• Educational Institutions.
   

Please note an overdraft is not allowed against a 5-year tax-saver FD or an FD held on behalf of a minor.

The following are the characteristics of OD against FD:

• Payback: The tenure of paying back the overdraft amount is the same as the fixed deposit’s term. For example, if your fixed deposit is for two years, your loan payback period will also be two years. However, you should keep in mind that the payback duration might be shorter than, but not greater than, the tenure of the FD.
• Status of FD: The FD amount continues to earn interest as usual. There are no penalties.
• Processing Fee: Unlike other loans, there are generally no processing fees involved in the case of OD against an FD.
• Credit Score: When you apply for any kind of loan, the lenders have a look at your credit score before granting the loan. However, you can avail an overdraft against your Fixed Deposit even if your credit score is low, as this is secured against FDs.
• Lower interest rates: Interest rates are the most crucial factor to look out for in any debt instrument. A higher interest rate means you end up paying much more than you borrowed.
  Here, personal loans could have interest rates as high as 16% in the case of bank lenders and 30% in the case of NBFCs, depending on the lender. But overdraft against FDs will only have an interest rate of 1 or 2% more than the FD interest rate. That means if the FD interest rate is 7%, the loan interest rate would be 8% or 9%. Since the FD interest rate is cancelled, you pay only 1 or 2%. This makes overdraft against FD one of the lowest interest rate loan options.
• Minimal or no paperwork: Overdraft against FD is provided with your FD as collateral. Moreover, having FD in a bank means you already have a relationship with that bank, making the loan process quicker. Hence, overdraft against FD often needs very little paperwork. If your bank allows taking overdrafts against FD online, the process will be even simpler.
• Easier prepayment norms: Prepayment is another hassle regarding regular loans. Even if you have the amount to repay the loan, some banks won’t allow the same, and you may have to pay interest even if you prepay. But overdraft against FD gives you complete flexibility in this regard. You can prepay the loan anytime you want without any extra charges.

The benefits of an overdraft against Fixed Deposits are as follows:

• Flexible Tenure: An individual can choose up to 18 months that suit their needs, providing flexibility in financial planning and minimising unnecessary strain.
• Zero Processing Fees: OD against FD is a cost-effective solution with no processing fees, ensuring no extra charges during the application process, subject to terms and conditions.
• No Prepayment Charges: The investor can repay the overdraft amount without penalties, offering financial freedom and potential savings on interest costs, subject to terms and conditions.
• Easy Documentation: A simplified and hassle-free documentation process makes availing the fixed deposit overdraft easy and convenient when needed.
• OD Auto-renewal Facility: The overdraft facility automatically renews with the fixed deposit, eliminating the need for re-documentation and ensuring continued accessibility.

You can apply for an OD against FD both online and offline:

Online

• Log into your net banking account using your credentials. 
• Go to the tab on ‘Fixed Deposits’.
• Select ‘Overdraft Facility’. 
• Enter details about the amount required, the tenure of the OD etc. 
• On submitting, the bank will review your request and approve it within a couple of days/hours/instantly. 
• Upon approval, your account will be credited with the requested amount.

Offline

• Visit a bank branch where your FD is being held.
• Fill out an application form.
• Share the FD Receipt 
• After submitting, it might take a couple of days for the bank to approve the request.
• On approval, the amount will be credited to your account.

Many banks do not have any provision for closing the OD online. You will have to visit the branch where your account is registered and request the closure of the overdraft. You can pay off the overdraft by writing a cheque or transferring the funds online. Only after the balance is paid can you request closure of the OD.

If your bank allows you to close the OD online, the first step is to sign in to your net banking account, select ‘Fixed Deposit’ and then select ‘Close Overdraft’. If there is any pending balance, you must pay it off to close the overdraft.

In addition to assured returns, flexible tenure choices, liquidity, tax savings, and loan alternatives, fixed deposits provide investors another advantage: credit card options against FD. This secured credit option is offered against your fixed deposit, with a credit limit ranging from 75% to 85% of the FD value.

If used wisely, an overdraft facility against FD can be the best option to meet your short-term financial needs. Let us compare the same with other debt options to understand this better.

One alternative is a personal loan, often with a much higher interest rate. Furthermore, the process of availing of the loan may be lengthy. Above all, you must have a good credit score and history to get a personal loan. Even though most banks have an online application process for personal loans, disbursal may take up to one week.

Another option you have is a credit card. But you will have to repay the whole amount at once to avoid hefty interest charges. If you cannot afford or can only pay the minimum, interest charges above 40% per annum may accrue on the due amount. Hence, credit card debt is only beneficial if you can pay it back within a month. This applies even to credit cards taken against FDs.

Compared to this, an overdraft against FD is a better option. To begin with, you only have to pay significantly lower interest rates. You will have time till the end of the maturity period of the FD to repay the payment. You can prepay without any additional charges as well. But it would help if you had an FD open with a bank that allows overdraft facility to avail the same. Furthermore, the amount of money you can take as an overdraft will depend on the FD amount you have as well.

An overdraft against a fixed deposit allows you the flexibility of using your FD corpus for short-term needs at minimal costs. It ensures that you do not lose the return on the whole FD amount. You can choose the duration and the amount you want to utilise temporarily. Moreover, the OD against FD interest rate is very low compared to unsecured overdraft plans.

So, if you are thinking of breaking your FD due to a temporary cash requirement, then opt for an overdraft instead of a premature withdrawal. Also, ensure to pay off the overdraft amount as soon as possible to get the maximum benefit out of your FD.