Overdraft Against A Fixed Deposit - Better Option than Closing

29 June 2024 | By INDIE

An appealing feature of Fixed Deposit accounts is the interest they give out at the end of the investment tenure. But there are times when you may face an emergency expense. You may consider redeeming your investments, including closing your fixed deposit account. But before withdrawing your FD savings, you must also consider the penalty for premature closure. Instead of withdrawing your FD, you can opt for a viable alternative that does not involve closing your account. The option is the overdraft facility against your fixed deposit. However, before we proceed further, let us answer what is an overdraft against FD?


What is an Overdraft (OD) against an FD facility?

The OD against FD is amongst the quickest methods to borrow money from the bank. You can pledge your fixed deposit as collateral for an OD. The interest rate for the OD facility is generally 7-8% annually. They charge nearly 1-2% higher interest than the underlying fixed deposit on the overdraft against the FD facility.


The Eligibility Criteria for the OD Facility:

Meet these eligibility criteria if you want to access the bank’s overdraft against FD facility:

- You must hold an individual or joint FD

-  Your age should be over 18

-  You can produce a valid ID and address proof

-  Your fixed deposit should not be a five-year tax-free FD


Why is OD Preferrable to Closing Your Fixed Deposit?

Here are a few benefits of opting for OD against FD instead of closing your fixed deposit:

❖ Preserves Your Investment:

Stability and assured returns are the reasons behind the popularity of fixed deposits. You can preserve the original investment and continue earning interest with the help of this facility. Hence, you don’t lose potential earnings.

 ❖ Immediate Liquidity:

You can access nearly 90% of your fixed deposit’s value with the help of ODs. Instant liquidity is a salient benefit, especially for organizations needing funds at short notice. Furthermore, unlike loans, overdrafts are cost-effective because they generally don’t have prepayment charges or processing fees.

❖ Customer-Friendly Interest Rates:

ODs generally offer interest rates favoring account holders. Favorable interest rates benefit businesses seeking short-term financial solutions but don’t want to incur the burden associated with high-interest rates.

❖ Efficient Online Processes:

Accessing the overdraft facility against the fixed deposit is convenient nowadays because of online digital banking services. You can easily manage your overdraft with just a few clicks on different baking websites. Save time and effort by opting for the online overdraft facility.

❖ Flexible Tenure:

Eighteen months is the maximum tenure for the OD facility[1] , and you can choose one that suits you. Flexible tenure helps you to plan your finances and avoid financial strain.

Also Read: What happens when you withdraw fixed deposit before maturity?


Factors to Consider Before Opting for OD:

Consider these factors before opting for the overdraft facility:

➔ Financial Condition:

Consult a financial advisor as soon as possible to get a clear picture of your financial condition. They can offer insightful and personalized tips customized to your financial goals and situation.

➔ Interest rates:

Overdraft services generally have lower interest rates as the FD functions as collateral, alleviating the risk. However, note that the interest rates can vary from bank to bank. Hence, assess the interest rates of different banks and financial institutions.

➔ Terms and Conditions:

Carefully read and assess all the terms and conditions of your bank’s OD facility. Look up for factors like prepayment, foreclosure, and late payment charges.

➔ Tax Implications:

The interest on fixed deposits is taxable. So, you must understand the impact on your overall tax liability before opting for an overdraft facility.

You should also check the repayment flexibility and numerous other factors apart from these four. Assessing everything carefully will help you decide whether you want to withdraw your fixed deposit or opt for an overdraft.




Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.