Everyone has a financial emergency when they need quick cash some time or the other. The recent COVID-19 pandemic created enough financial crises to last for the rest of the century! With that in mind, you would do well to have provisions in place for quick cash.
One of the best ways to have a source of quick cash is through an overdraft on your Fixed deposit account. The best part is that when you avail of such a facility, you make use of money that is yours, to begin with.
Overdraft Facility Against FD Explained
Most banks offer an overdraft facility to their customers. This amount is lower than the deposit amount, and the interest rate is typically less than the FD current interest rate.
An overdraft is a total amount defined at the time of application for the fixed deposit. It is a maximum amount, but the interest charged will be on the amount availed and not the total amount.
Let us consider this example. Mrs. Ramprasad has an FD of ₹1 lakh with her local bank branch. She has an overdraft limit of 90%. If she wants to avail of a loan of ₹25,000, she will only be using 25% of the deposit amount.
So, even though Mrs. Ramprasad has a 90% overdraft limit, she will only pay interest on 25% of the deposit amount. Overdrafts on FDs typically do not have any duration. You have to continue paying interest on the overdraft until you have paid back your loan.
When you avail of the overdraft facility, the interest rate is slightly above the fixed deposit rates in India, typically 1% to 2% higher. So, if the interest rate for your fixed deposit account is 6%, you will have to pay interest between 7% and 8%.
Advantages and Disadvantages of Overdraft Against Fixed Deposit
Availing of an overdraft against your fixed deposit is indeed a convenient arrangement when you need quick cash in an emergency. There are several advantages, but then there are a few downsides to this arrangement.
Advantages of Overdraft Against Fixed Deposit
- You can get instant cash in case of a financial emergency.
- The money you borrow is, in effect, your own.
- Most banks, especially after the COVID-19 pandemic, offer online overdrafts, allowing you to get the money from the comfort of your home.
- There is no obligation to make monthly payments to repay the overdraft – you can pay at your convenience.
- You will be charged interest only against the amount utilized against your overdraft and the number of days you avail of it.
Disadvantages of Overdraft Against Fixed Deposit
- If you have long-term debts, you would be better off getting a long-term loan, as an FD overdraft can severely impact your fixed deposit account and your future investment plans.
- Many banks offer checkbooks and online banking for availing of overdrafts. They make it easy to access the extra cash, but the bank benefits the most through the interest they collect in the long run.
- Using the overdraft facility can become a habit, reducing your motivation to be financially responsible.
- Default on a loan or overdraft against your fixed deposit can impact your credit score.
Several years ago this correspondent was in dire need of higher education money. However, the burden of high-interest rates on personal loans is too great. But having a fixed-term deposit in the bank will be beneficial, and it will be useful to take out a loan. This is a new lending technique that allows you to bet anywhere from 60-80% of your FD on a loan. This isn’t the only thing that’s amazing, but when I chose this neighborhood, my interest rate and monthly EMI were also only between 1-2%. For payments, there is an added advantage over time that EMI becomes cheaper. It is a flexible and hassle-free way. Interest continues to be paid on the FD amount as this percentage is added to the total loan interest rate. Hence they are generally best when need is for a minimal amount.
Over the last couple of years, fixed deposit rates in India have been more or less constant. Therefore, you can get a good idea of the interest you will have to pay. When you open a fixed deposit, choose the overdraft option as well.