Overdraft Against FD

What is An Overdraft Against FD?

An overdraft against fixed deposit is a financial arrangement where a bank or NBFC allows you to borrow money against your FD account in case of an emergency requirement without having to disturb or break an FD. With an OD against FD, you can borrow funds up to a certain limit, usually a percentage of up to 90% of the FD amount. The FD will serve as collateral for the overdraft facility without the need to close the FD at any given point before its maturity. The interest rate charged on the overdraft amount is typically lower than that of unsecured loans, making it a cost-effective borrowing option for individuals who have FDs but need immediate funds.

Overdraft Against FD Interest Rate

The interest rates for overdraft against fixed deposits vary depending on several factors, including the bank and NBFCs terms and policies, the amount of overdraft, and the tenure of the facility. The interest rates for OD against FDs are lower compared to other types of loans because the FD acts as collateral, reducing the risk for the lender.

Understanding Overdraft Against FD

When you require emergency funds but you want to retain your FD account, you can opt for an overdraft against FD. The bank or financial institution with whom you have an active FD account will allow you to borrow a certain percentage of about 75% - 90% of your FD’s value, giving you a line of credit with a limit that you can access anytime when needed. Here is how an OD against FD works:

• FD as Collateral: Your fixed deposit serves as collateral for the overdraft loan. Allowing you to borrow money against your FD instead of withdrawing it.
• Setting the Limit: The bank sets a certain withdrawal limit for your overdraft, which is usually 75% to 90% of your FD amount. This limit may vary depending on the bank's policies and your creditworthiness.
• Accessing Funds: After your overdraft account is available, you can access funds from your account as needed, up to the specified limit. You can withdraw these funds through various channels, such as checks, ATM withdrawals, or electronic transfers.
• Interest Charges: The interest on the overdraft will only be charged on the money withdrawn. It will also be lower compared to other types of loans since it's secured by the FD.
• Repayment: The repayment amount of the borrowed sum should be paid regularly along with the applicable interest within the agreed-upon tenure. Repayment terms may vary based on the bank's policies and the terms of the overdraft agreement.

Overall, OD against FD provides a convenient and cost-effective way to access funds quickly without having to break your fixed deposit. It's particularly useful for individuals who need short-term liquidity while keeping their FD intact for future financial goals.

Types of Overdraft Against FD

Banks and financial institutions offer two types of overdraft against FD, these are:

Secured Overdraft
Unsecured Overdraft

• Secured OD against FD: In this type of overdraft account, the FD is taken as collateral, and provides security to the lender. You can access funds up to a certain percentage of the FD amount offered by the Bank or NBFC. Interest is then charged only on the amount used from the overdraft facility, while the FD continues to earn interest as usual.
• Unsecured overdraft against fixed deposit:Some banks may also offer overdraft facilities against FDs without asking the FD to be pledged as collateral. Instead, the bank will assess your creditworthiness and may offer an overdraft based on your financial history, income, and relationship with the bank. The interest rates, however, may be slightly higher compared to secured overdrafts against FDs, and the terms may vary depending on the lender's policies.

The interest rates for the overdraft are generally a little higher than the FD interest rate, usually ranging from 1% to 3%. For example, if the FD interest rate is 6%, the overdraft interest rate might be set at 2% above this rate, resulting in an effective interest rate of 8%.

So also, the interest rate is charged only on the amount that is withdrawn. For example, if you have an overdraft limit of ₹50,000 but you only withdraw ₹25,000, then the interest will be charged only against the ₹25,000 that has been withdrawn.

Do check with your bank or financial institution to get the current interest rates, as they may vary based on market conditions and individual terms and conditions. Also, explore all available options before you avail of an overdraft against your FD.

Overdraft Against FD Eligibility Criteria

The eligibility criteria to get an overdraft against FD are as follows:

• Indian citizens or NRIs aged 18 and above.
• Hindu Undivided Families (HUFs), partnership firms, family trusts, corporations, associations, educational institutions, societies, and clubs.
• Holders of individual and joint fixed deposit accounts are eligible.
• FDs in the name of minors will not be able to avail overdraft against FD.
• Banks and NBFCs may also disallow FD holders with a 5-year tax saver scheme to avail an OD against FD.

Features & Benefits of OD Against FD

There are several features and benefits of taking an overdraft against FD, these are:

• Instant Access to Funds: Avail overdraft against FD for up to 90% of your FD account and instantly fulfil your urgent financial needs.
• Minimal Requirements:The minimum FD amount required to get an overdraft against FD is ₹25,000.
• Convenient Application: Banks and NBFCs offer you a quick and hassle-free application process, that saves your time and effort. Apply through net banking or visit the branch with minimal documentation.
• Zero Processing Fee: Usually, there is no processing fee charged on OD against FD, which reduces the overall loan cost.
• Competitive Interest Rates: OD against FD usually offers interest rates that are typically 1-2% higher than FD rates. With the minimum interest rate being 1% - 2% above FD and the maximum interest rate being 3% - 4% above FD rate.
• Wide Range of Tenures: The repayment tenures for the overdraft usually ranges from 6 months to 5 years or is linked to the FD tenure
• Maximum Overdraft Amount: You can get a maximum overdraft amount of up to 95% of the fixed deposit value.
• Flexibility in Account Linking: Banks and NBFCs offer the flexibility to choose between a Savings Account or a Current Account to link to your FD, providing convenience of banking transactions.
• Cancellation Option: Some banks and financial institutions offer the option to cancel an overdraft facility via NetBanking if needed.

Is Overdraft on FD Better Than Loan Against FD

Choosing between an overdraft against fixed deposit and a loan against FDs depend on your individual financial needs and preferences. While both options use the value of FDs, to offer financial aid instead of closing the FD, they differ in terms of flexibility and interest payments.

An OD against FD offers greater flexibility as it allows you to withdraw funds as needed, up to a limit set by the bank or NBFC, while only paying interest on the amount that you withdraw. This flexibility makes it convenient for you to access your cash whenever you’re in need. On the other hand, a loan against FD provides a lump sum amount upfront, with fixed monthly repayments and interest calculated on the entire loan amount.

Ultimately, whether an OD against FD is better than a loan against FD will depend on your financial requirements, repayment capabilities, and preferences.

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