Overdraft Against FD: Meaning, Benefits, Interest Rate & How It Works

Introduction

If you are a fixed deposit (FD) holder, you might have considered or heard about the option to take an overdraft against FD. This is a convenient financial product offered by most banks that allows you to borrow money against your FD without breaking it. Overdraft against FD is often seen as a quick and low-cost way to access funds when you need them.

This article will explain what overdraft against FD means, how it works, the interest rates offered by leading banks like HDFC, SBI, ICICI, Axis Bank, and IDFC Bank, and how to calculate the interest.

What Is Overdraft Against FD?

Overdraft against FD is a facility where a person can avail of a loan from the bank using their Fixed Deposit (FD) as collateral. In this arrangement, the FD remains intact, and the individual can borrow a certain percentage of the FD amount, usually up to 90%, based on the bank’s terms.

The loan is provided on a short-term basis, and interest is charged on the amount withdrawn, which is typically lower than personal loan interest rates. The loan amount is directly linked to the FD, and you do not need to liquidate your FD to access the funds.

How Does Overdraft Against FD Work?

The process for availing an overdraft against FD works as follows:

• Application: The FD holder applies to the bank for an overdraft facility.

• Loan Amount: The bank offers a loan based on the FD value, usually up to 90% of the FD amount.

• Interest Rate: The overdraft amount is charged an interest rate, which is lower than that of a personal loan.

• Repayment: The loan can be repaid either in lump sum or through monthly installments. However, if you withdraw the overdraft in smaller amounts, the bank typically charges interest only on the utilized portion.

• FD Continuity: The FD remains intact and continues to earn interest. However, the bank may place a lien on the FD, meaning the FD cannot be accessed for withdrawal until the overdraft is cleared.

This facility is ideal for individuals who need funds urgently but do not want to break their fixed deposit and for those who want to keep earning interest on the FD.

Benefits of Overdraft Against FD

There are several advantages to using an overdraft against FD, including:

• Quick Access to Funds: Overdrafts are processed faster than loans, and funds are usually available within a short time.

• Lower Interest Rates: Since the loan is secured by the FD, banks offer lower interest rates compared to personal loans.

• Retain FD Benefits: You do not lose the interest earned on your FD while borrowing against it.

• Flexible Repayment: The overdraft amount can be paid in installments or in lump sum at your convenience.

Overdraft Against FD Interest Rate

The interest rate on overdraft against FD varies across banks, but it is generally lower than personal loan interest rates. The rate is typically 1-2% higher than the FD interest rate. For example:

If the interest rate on your FD is 6%, the interest rate on the overdraft may range from 7% to 8%.

It’s important to note that interest is charged only on the utilized overdraft amount and not the total loan.

Overdraft Against FD Calculator

An overdraft against FD calculator helps determine the loan amount and interest charges based on your FD balance, the percentage allowed for overdraft, and the applicable interest rate.

Here’s how you can use the OD against FD calculator:

• Enter the FD value.

• Select the percentage of FD allowed for overdraft (usually 90%).

• Choose the interest rate (based on your FD rate plus any additional rate charged by the bank).

The calculator will show the maximum loan amount you can get, the monthly interest, and total interest based on the term you choose.

This tool simplifies the process of understanding your overdraft terms.

Overdraft Against FD from Different Banks

Overdraft Against FD HDFC

HDFC offers overdraft against FD with the following features:

• Loan amount: Up to 90% of the FD value

• Interest rate: Generally 1-2% higher than FD rate

• Repayment: Flexible repayment options (monthly, lump sum)

Overdraft Against FD SBI

State Bank of India (SBI) provides an overdraft facility on FDs:

• Loan amount: Up to 90% of FD value

• Interest rate: Slightly higher than FD interest rates

• Repayment: Monthly installments or lump sum payment

Overdraft Against FD ICICI

ICICI offers an overdraft facility on FDs with features like:

• Loan amount: Up to 90% of FD value

• Interest rate: Competitive rates based on FD rates

• Repayment: Customizable repayment terms

Overdraft Against FD Axis Bank

Axis Bank provides overdrafts against FD with:

• Loan amount: Up to 90% of the FD amount

• Interest rate: Based on FD rate plus additional percentage

• Repayment: Flexible repayment options

Overdraft Against FD IDFC Bank

IDFC offers overdrafts with:

• Loan amount: Up to 90% of FD value

• Interest rate: Competitive and linked to FD interest rate

• Repayment: Flexible options for repayment

Each bank has its specific terms and conditions, so checking the bank’s website or consulting with a representative is advised.

Overdraft Against FD Example

Let’s consider an example to understand how overdraft against FD works:

• FD Amount: ₹1,00,000

• Interest Rate on FD: 6%

• Overdraft Allowed: 90%

• Overdraft Amount: ₹90,000 (maximum loan allowed)

• Overdraft Interest Rate: 7.5%

In this case, you can borrow up to ₹90,000, and you will be charged interest at 7.5% annually on the amount you utilize.

Documents Required for Overdraft Against FD

To avail of an overdraft against FD, the following documents are usually required:

• Fixed Deposit Receipt (FDR) or certificate

• Identity proof (Aadhar card, passport, etc.)

• Address proof (Aadhar, utility bill, etc.)

• Pan Card (if applicable)

These documents are essential for verification and processing of your overdraft request.

Risks of Overdraft Against FD

While overdraft against FD offers easy access to funds, there are some risks and considerations:

• Interest Payments: The interest charged is higher than the FD interest rate, though lower than personal loan rates.

• Reduced FD Earnings: Since the bank places a lien on the FD, you may not be able to fully access the FD until the overdraft is repaid.

• Penalties: Late repayment of the overdraft can lead to penalties or interest rate hikes.

Common Misconceptions About Overdraft Against FD

Some common misconceptions include:

• “Overdraft against FD is the same as taking a loan”: While both involve borrowing, an overdraft is linked directly to your FD, and you can borrow only up to a certain limit.

• “Overdraft against FD is free of charge”: Interest is charged on the borrowed amount, and penalties may apply for delayed repayment.

• “You lose all interest on your FD”: Your FD continues to earn interest, though the amount available for use is reduced by the overdraft.

Conclusion

Overdraft against FD is a flexible and secure borrowing option for those who need funds quickly but don’t want to liquidate their fixed deposits. It offers lower interest rates than personal loans and ensures that the FD continues to earn interest. However, it’s important to understand the interest rates, repayment terms, and risks involved.

By using this feature, you can maintain the stability of your fixed deposit while having access to immediate funds.

Disclaimer

This article is intended solely for educational and informational purposes. It does not constitute financial, legal, or investment advice. BondScanner does not provide personalized banking or advisory services through this content.

Readers are encouraged to consult with bank representatives or financial advisors for specific details on overdraft against FD offerings.