Nearly 350 million people living in India fall into the middle-income group with limited disposable income. The predominant tendency of this population is to prefer capital security to an investment with wealth-generating potential. That is why a fixed deposit (FD) is considered one of the most popular investments in the country. To make FD schemes even more lucrative, banks often offer an ‘overdraft’ feature against them.
Financial emergencies often strike without warning. In such cases, many investors prefer a premature withdrawal of funds from their fixed deposit over applying for a loan. However, if you use the overdraft feature against your FD, you can obtain a credit. Thus, account holders can get a loan without breaking their FDs.
Here is all you need to know about the ‘overdraft against FD’ feature.
The interest rate of a typical personal loan is upwards of 10%. The lower your credit score, the higher this rate shoots. Now, with an overdraft against FD, interest rates differ across banks. However, since the FD is intact, account holders continue to earn interest against it. On an average, the interest rate of the overdraft is about 2% above that of the fixed deposit. Still, the net interest rate is less than a personal loan.
Moreover, the interest charged for the overdraft will be according to the credit withdrawn. For example, if you have an FD of Rs. 1,00,000 and you take an overdraft of Rs. 40,000, the interest will be charged for Rs. 40,000, while you continue to receive FD interest over the whole amount of Rs. 1,00,000.
Eligibility and Term Period
The eligibility, term period, interest rate, EMI, and other variables of a loan depend on an individual’s credit score. A person with a low credit score is eligible only for lower amount loans at higher interest rates. In case of an overdraft, individuals can receive a credit of 70 to 95% of their fixed deposit amount. For example, if you have an FD of Rs. 1,00,000 and the maximum overdraft is 90%, you are eligible for a credit of up to Rs. 90,000. Account holders can also enjoy flexibility with payment options, rollover mode, maturity, etc.
The term period of the overdraft is limited to the maturity term of the FD. If an individual fails to pay the credit amount, it will be adjusted towards the FD amount.
In addition, an overdraft can be paid without any pre-payment or foreclosure charges. An overdraft also frees the individual from paying a pre-mature withdrawal fee.
Documentation and Processing
An overdraft requires little-to-no documentation. As the individual is already an account holder, the bank has the necessary KYC (Know Your Customer) documents, proof of income, identification proof.
While the processing time varies from bank to bank, on an average, it is faster than applying for a loan. Most banks offer an overdraft application through net banking. To avail this feature, the individual has to opt for the overdraft facility when they open an FD account online.
In addition, most banks do not charge a processing fee for an overdraft.
Overdraft or FD Lien
Some banks mark a lien against the FD for an overdraft. A lien is a banker’s right to retain an amount belonging to the customer. This means that when an individual receives a credit against their fixed deposit, the bank will retain some or the whole amount of the FD. So, the individual cannot withdraw funds from the FD as long as the overdraft amount is not received by the bank.