What is an overdraft against FD?
5 min read | 5 months ago
With increasingly attractive FD rates and multiple tenure options, fixed deposits are holding onto their reputation as one of the safest and most popular investments in India. But again, there are various scenarios where their lack of immediate liquidity may lead to a fund crunch. Many investors have often had to break their FDs in order to raise money to meet such urgent financial commitments/obligations. Yet, what if you came to know about another alternative that some banks offer on FDs to their customers? Yes, we’re talking about overdraft facilities which may be immensely beneficial for almost everyone in these scenarios. Let us find out more on the same below.
What is an overdraft against FDs?
An overdraft against FDs, in simple terms, is another loan facility provided by banks. It allows borrowers to borrow money against their fixed deposit. The bank allows you to borrow a fraction of the FD’s value, and you can use the borrowed money as per your wishes. It is the best option for those who need loans for short periods and do not wish to break their FDs. Moreover, these loans come with lower interest rates as compared to other credit options, due to the FD being held as collateral.
How does an overdraft against FDs work?
One of the biggest benefits of using an overdraft against FDs is that you can get a loan at a much lower interest rate than other types of loans. Suppose you are a retiree and want to raise some money instantly to build an additional floor for your house or take care of your child’s wedding/higher education expenses. In this case, you can easily get an overdraft against your FD and repay it conveniently over time, while enjoying the benefits of higher senior citizen fixed deposit interest rates simultaneously. There is usually no prepayment penalty for clearing these amounts, while you can also maintain financial discipline since you cannot borrow more than a percentage of the FD value
How to apply for an overdraft against FDs
To apply for an overdraft against FDs, you need to approach your bank and submit an application for this purpose. The bank will check the value of your FD and offer you a loan amount based on the same. You can accept or reject the loan offer as per your convenience. It is important to note that the loan amount is linked to the value of your FD, and if you default on the loan, your FD will be liquidated. Therefore, it is crucial to use the facility responsibly and repay the loan on time.
Things to consider before applying for an overdraft against FDs
Before applying for an overdraft against FDs, there are a few things you should consider:
1. Interest rate:
Although the interest rate on an overdraft against FDs is lower than other types of loans, it is still important to compare the rates offered by different banks to get the best deal.
2. Loan amount:
The loan amount you can get against your FD will vary from bank to bank. Make sure to check the maximum loan amount offered by your bank before applying for the facility.
3. Flexibility:
Some banks offer more flexibility in terms of repayment than others. Make sure to check the repayment options offered by your bank beforehand.
Conclusion
An overdraft against FDs is a great way to get a loan at a low interest rate while keeping your investment intact. It is a flexible and convenient option for those who need funds for a short period and to cover sudden costs. Yet, it is important to reiterate that repaying the amount responsibly without defaults should always be your priority.
FAQs
1. What is an overdraft against FDs?
An overdraft against FDs is a facility that allows you to withdraw funds from your fixed deposit account with the bank, without breaking the deposit.
2. How can you use an overdraft against FDs?
You can use an overdraft against FDs to meet urgent financial needs without breaking your fixed deposit. It is a cheaper alternative to personal loans.
3. What are the benefits of using an overdraft against FDs?
The benefits of using an overdraft against FDs include low interest rates, quick disbursal of funds, and the ability to maintain your fixed deposit account.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
