An overdraft against a Fixed Deposit is one of the fastest and most cost-effective ways to borrow money from a bank without prematurely breaking the FD. In this arrangement, your FD serves as collateral for the OD facility. You can get an OD limit of up to 80% of your FD’s value. However, this may vary by bank policies. Interest is charged only on the amount utilised, making it an economical borrowing option.

An overdraft against an FD is a Secured Loan that helps you borrow funds from your bank using your Fixed Deposit as collateral. This facility enables you to meet financial emergencies or fund personal or business needs without prematurely liquidating your FD. Since the Loan is secured, banks offer competitive interest rates, making it an attractive alternative to Personal Loans or Credit Cards.

Benefits of OD Against FD

Banks generally allow an OD limit of up to 80% of the FD value, ensuring you can access a substantial amount of funds. The interest rate on an OD is typically 2% above the FD interest rate, making it a cost-effective borrowing option. You only pay interest on the amount you withdraw and use, not on the total sanctioned amount.

Your FD Account earns interest, even while it serves as collateral. You can repay the borrowed amount conveniently, provided the OD limit is not exceeded. Since the FD is collateral, a credit score check is often not required. Banks process OD against FD requests quickly, sometimes within hours. Unlike other Secured Loans, there is no need for asset valuation.

Points to remember

The facility is available only to existing bank customers with FDs. An overdraft against an FD facility for traditional or Cumulative Retail FDs may be availed of only if the FD is a minimum of six months in tenure. The sanction amount is Rs. 25,000 or more. Auto-renewal instructions for the FD are necessary for eligibility. For short-term FDs, the OD’s duration is set for a year and must not surpass the tenure of the FD.

However, it can be accepted if it is in auto-renewal mode. For multiple deposits, the OD’s duration cannot exceed the term of the earliest maturing FD. The interest is debited on the first day of the month for the utilised amount for both existing and new customers. The documents required for this process include an Overdraft against FD application form, a delivery letter for DPN, a Demand Promissory Note, and a lien letter (part of the account opening form).

Closing thoughts

An Overdraft against an FD is a convenient and affordable financial solution for those in need of quick liquidity without disrupting their savings. With its flexible repayment terms and cost-effectiveness, it stands out as a smart alternative to other borrowing options. However, it is essential to use this facility judiciously and ensure timely repayments to avoid penalties. Confirm with your bank about them.