When an investor opts for an overdraft facility against their fixed deposit, the issuer enables them to withdraw funds up to a certain percentage of the FD amount. This usually ranges between 70% and 90% of the deposit. The exact percentage can vary based on the issuer’s policies.

Let's assume you have a fixed deposit of ₹5 Lakhs and the issuer allows an overdraft of up to 85% of the FD amount. In this case, you can access up to ₹4,25,000 as an overdraft. The FD continues to earn interest, and you can use the overdraft amount as needed.

Interest Rates and Charges

The interest rate on the overdraft amount is typically 1% to 2% higher than the FD interest rate. For example, let's say your online FD earns an interest rate of 6% p.a. In this case, the overdraft facility might come with an interest rate of 7% to 8% p.a. This interest is only payable on the amount actually used from the overdraft limit. It is not levied on the entire sanctioned amount.

It is important to note that the interest on the overdraft is calculated on a daily basis. Also, it is debited monthly. Therefore, the sooner the borrowed amount is repaid, the lesser the interest cost.

Benefits of Leveraging Overdraft with Fixed Deposits

Here are some advantages that you can enjoy by getting an overdraft against fixed deposits:

1. Liquidity Without Breaking the FD

One of the primary benefits of this facility is that it provides liquidity without the need to break the fixed deposit. Breaking an FD prematurely often results in a penalty and loss of interest. By using the overdraft facility, investors could meet their financial needs while the FD continues to earn interest.

2. Lower Interest Costs Compared to Personal Loans

The interest rate on an overdraft against FD is generally lower compared to personal loans or credit card debt. This makes it a cost-effective option for short-term financial needs.

3. Flexible Repayment

The repayment of the overdraft amount is flexible. There are no fixed EMIs, and the borrower can repay the amount at their convenience. This flexibility can be particularly useful in managing cash flows effectively.

4. Continued Interest Earnings

Since the FD remains intact, it continues to earn interest, ensuring that you do not lose out on your investment returns.

Factors to Consider

Leveraging an overdraft facility against an FD comes with numerous benefits. However, there are several factors you should consider before opting for an FD:

1. Interest Rate and Charges

Before opting for an overdraft, compare the interest rates and other charges of the FD and this facility across different issuers. Even a small difference in the rate could have a significant impact on the total cost of borrowing and your investment returns.

2. Tenor of the FD

The tenor of the FD plays a major role in determining the flexibility and duration of the overdraft facility. You should ensure that the tenor of the FD aligns with your financial needs.

3. Overdraft Limit

Different issuers offer varying overdraft limits. It is important to understand the maximum limit available and ensure that it meets the financial requirements.

4. Repayment Strategy

While the repayment terms are flexible, it is advisable to have a clear repayment strategy. This helps avoid accruing high interest costs over time. Regularly repaying the borrowed amount can help minimise the interest burden.

5. Impact on Credit Score

Using an overdraft facility and managing it responsibly can positively impact the credit score. Conversely, failure to repay on time may have a negative impact. You should be mindful of this aspect when opting for an overdraft.

Examples

Here are some examples to understand different ways in which you can utilise this overdraft facility effectively:

Scenario 1: Managing Short-Term Financial Needs

Mr. Sharma has a fixed deposit of ₹10 Lakhs earning an interest rate of 6.5% p.a. He requires ₹3 Lakhs urgently for a medical emergency. Instead of breaking the FD and losing out on interest, he opts for an overdraft facility. The bank offers an overdraft limit of 85% of the FD amount at an interest rate of 7.5% p.a. Mr. Sharma withdraws ₹3 Lakhs and repays it over the next 6 months. This way, he meets his financial requirements without breaking his FD, which continues to earn interest.

Scenario 2: Business Cash Flow Management

Ms. Verma, a small business owner, has a fixed deposit of ₹15 Lakhs. She faces a temporary cash flow issue and needs ₹5 Lakhs to manage her business operations. She uses the overdraft facility against her FD to bridge this gap. The interest on the overdraft is lower than the interest she would have to pay on a business loan. This makes it a cost-effective solution for her short-term liquidity needs.

Leveraging an overdraft facility against fixed deposits offers a flexible and cost-effective way to meet short-term financial needs without breaking the FD. It ensures liquidity while allowing the fixed deposit to continue earning interest. However, it is important to carefully consider the interest rates, charges, and repayment terms before opting for this facility. By doing so, you can effectively manage your finances and make the most of your investments.