What is Overdraft Against FD & its Mean

In the world of personal finance, most individuals would have faced liquidity issues at some point in their lives. Due to pay cuts, job loss, or any sudden medical emergency, people would seek convenient solutions to meet their immediate financial needs without liquidating investments. Your fixed deposits offer quick liquidity. You could withdraw your FD prematurely or opt for an overdraft against a fixed deposit. A unique facility allows individuals to access funds by pledging their FD as collateral. 

Let’s first understand what an overdraft facility means and how it could benefit your short-term financial needs.

What is Overdraft Against FD?

Fixed deposits are one of the most popular investment options in India. FDs allow you to invest money in a bank or NBFC for a short or long period to earn a fixed interest. FDs have a lower risk than any other investment options because they have no market linkage. 

However, FDs come with a lock-in period, so you can’t withdraw the amount before maturity. But if you had to withdraw the deposited amount, you would need to break your FD and might have to pay some penalty based on the tenure and bank regulations.

In such scenarios of urgent financial needs, you can avail of an overdraft against your FD. Banks and other financial institutions allow funds up to 90% of the fixed deposit value. An overdraft facility provides a convenient way to meet your urgent financial needs. One of the most important features/advantages of OD against FD is that the bank doesn’t charge interest on the total amount. Banks charge interest only on the funds used. Moreover, the interest charged on OD against FD is typically 1-2% higher than the FD interest rate.

Benefits of an Overdraft Against FD

• Flexibility: Overdraft against FD offers flexible access to funds, allowing individuals to withdraw money up to the approved limit whenever needed. They can choose to withdraw the entire sanctioned amount or only a portion of it, based on their requirements.
• Competitive Interest Rates: The interest rates charged on overdraft facilities are often lower than on personal loans or credit cards. Since the FD acts as collateral, financial institutions are more willing to offer favourable interest rates.
• Maintaining FD Benefits: By opting for an overdraft against FD, individuals can continue to enjoy the benefits associated with their fixed deposit, such as regular interest earnings and maturity benefits.
• Quick Approval: As the FD serves as collateral, the approval process for an overdraft against FD is generally faster than other forms of credit. Banks can readily assess the individual's creditworthiness based on the value of the fixed deposit.

Eligibility Criteria for Applying an OD Against FD

To qualify for an overdraft against FD, individuals typically need to meet the following criteria:

• Age: The applicant should be of legal age (usually 18 years or older) at the time of application.
• Fixed Deposit: The individual must hold a fixed deposit account with the bank or financial institution offering the overdraft facility.
• Credit History: A good credit history enhances the chances of approval. However, since the FD acts as collateral, the credit history may have less influence on the decision.

How to Apply for an OD Against FD?

Applying for an overdraft against FD is a straightforward process. It can be done through both online and offline channels. Let's explore the steps involved in each method.

1. Online Application

• Visit the official website and log into your net banking account
• Locate the “fixed deposit” tab and select “overdraft” facility
• Enter the details - the amount required and tenure of the OD
• Now submit the application form with all the required documents
• Bank will review your application, and upon approval, your account will be credited with the approved amount

2. Offline Application

• Visit the nearest branch of the bank where your FD is held
• Fill out the “Overdraft” application form
• Share your fixed deposit receipt along with other required documents
• After submitting the form, the bank will take a couple of days to approve
• Upon approval, the amount will be credited to your bank account

How to Close Overdraft Against FD?

Closing the overdraft against FD can be done by following these steps:

• Step 1: Repay the Outstanding Amount
  Ensure all outstanding dues on the overdraft facility are cleared by repaying the borrowed amount and the applicable interest and charges.
• Step 2: Inform the Bank
  Contact the bank and inform them about your intention to close the overdraft facility. This can be done through a written request or by visiting the branch in person.
• Step 3: Provide Necessary Documentation
  The bank may require you to submit certain documents, such as an application for closure, identity proof, and other necessary paperwork.
• Step 4: Complete the Closure Process
  Follow the instructions provided by the bank to complete the closure process. It may involve signing certain forms or settling any outstanding charges, if applicable.

Conclusion

Overdraft against FD provides individuals with a flexible and convenient way to access funds without breaking their fixed deposits. It offers various benefits, such as competitive interest rates, quick approval, and maintaining FD benefits. By understanding the eligibility criteria and application process, individuals can leverage this financial facility to meet their short-term financial needs while preserving their long-term investments.