We all know that Fixed deposits are considered to be less risky than other investment options. But, many times we feel hesitant to do FD due to the liquidity issue i.e. lock-in period which is applicable in the case of FD. So, to overcome this issue to some extent, an overdraft facility was introduced.
What is an overdraft facility against FD?
“Overdraft/loan facility is a facility given by banks to investors who have done fixed deposits”. As we already know, money can’t be withdrawn for a specific period in the case of FD. So, in case of an emergency, this facility can be helpful.
Generally, banks provide a 90% amount as overdraft/loan. However, it may differ from bank to bank. Interest on it is 1 to 2% higher than fixed deposit interest rates. E.g. Amount of FD is 100000 Rs. then up to 90% i.e. 90000 the overdraft facility is available. If FD’s rate of interest is 6% then in case of an overdraft, it will be around 7 to 8%.
Benefits:
Interest paid on utilized amount: Here, the interest is applicable only on the used amount and not on the entire amount. E.g. Your overdraft amount is 20000 rs. and you withdraw 5000 Rs. out of it for the use, then only the interest will be chargeable on 5000 Rs.
No processing fees: Processing fees is nil here.
No need to break FD: Because of this facility, in case of emergency, you can retain your FD intact, which can help you in achieving your financial goals. Some banks do offer the facility of withdrawing a partial amount from FD in case of emergency.
Quick disbursal: You can withdraw the money as soon as your overdraft account is created and money is available.
Convenience in repayment: Here, as per convenience, the user can pay the amount in a lump sum or installments.
When you should go for it?
In case of a short-term need for money, you can go for it E.g. Delay in salary credit. If you feel uncertain about your financial condition and think it may take a long time to get stable, then you can go for breaking your deposits. But remember, pre-mature FD withdrawal should be your last option as it may affect your financial goals.
Along with it, before going for it, terms and conditions should be well-read and understood as interest rates, facilities, etc. may differ from bank to bank.
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