Among the many pairs of terms that confuse individuals is OD against FD or OD (Overdraft) against FD (Fixed Deposit). We will understand this here.
One of the most popular investment vehicles for an individual who wants to invest his savings securely is a fixed deposit (FD). But do you know that it can be a reliable source of wealth as banks nowadays offer the highest FD interest rates? It can also get you instant liquidity and financial adaptability.
The quickest way of borrowing from a bank is through an OD facility against an FD. Well, this monetary arrangement unlocks an unusual way for individuals to use their fixed deposits towards meeting interim financial needs without violating the deposit.
In this blog, we will understand OD over FD and the process of getting access to such services.
What Is Overdraft?
Overdraft is a bank service to customers that enables them to draw money above their account value. It is, in essence, a credit limit associated with a bank account that offers support when, for whatever reason, the balance does not suffice to cover withdrawals or transactions.
Overdrafts have the advantage of being an effective quick fix for individuals or firms that are temporarily short of cash.
Fixed Deposit (FD) refers to an investment wherein a lump sum of money is placed with the bank or financial institution for a specified time duration at a uniform rate. FDs, since they are low-risk investments, appeal to those investors who consider themselves conservative and prefer steady returns.
Understanding OD Against FD
OD against FD is a financial structure wherein people can avail of an overdraft facility by mortgaging their fixed deposits as security. Alternatively, the fixed deposit acts as collateral for the overdraft. With an approved overdraft account, you will receive the desired amount of money in your account, just like any other beneficiary would when applying for a loan with the bank.
If you receive approval for the overdraft facility, then your cash withdrawal will be inundated into your bank account. One can also withdraw cash up to a particular limit.
The loan amount is determined by the deposit size in FD. This can even reach 90% to 95% of the deposit amount. Your bank will add interest to you from the time of borrowing up until repayment. With OD, you can repay the bank whenever it is convenient for you.
After returning the sum, at any time with available money, it is possible to take as much as needed from the account until the overdraft limit is reached. The bank needs no security on an overdraft facility since the borrower takes OD against the FD.
Putting money into your account reduces the amount you owe, which decreases your overdraft. Since the borrowed amount ledger may vary on a daily basis, interest related to the borrowed amount should be calculated per day.
As earlier mentioned, OD against FD facility is simply a short-term revolving credit facility. Use this facility when you need cash to meet financial commitments and pay it off immediately so the costs associated with interest do not pile up.
Eligibility For OD Against FD
- The loan against fixed deposits is available to all the owners of a particular deposit, whether they are individual or joint accounts.
- FD in a minor’s name is not eligible for this facility.
- This loan is not available to those investors who have FD in a 5-year tax-saving FD.
Essential Characteristics Of OD Against FD
- Maintaining Investment Integrity: Accessing an overdraft against FD enables individuals to manage urgent financial requirements without being forced to prematurely surrender a fixed deposit. This ensures that the investment has continued interest up to maturity.
- Lower Interest Rates: An overdraft against FD usually charges lower rates than unsecured loans or credit cards. The FD becomes the collateral backing, which results in better interest rates on overdraft facilities for the bank.
- Quick Access to Funds: A significant advantage of OD over FD is the availability of funds relatively quickly. The time required to obtain an overdraft is usually shorter since the FD plays as collateral.
- No EMIs for Repayment: Pay off the overdraft once you can afford it. You won’t need to repay the overdraft amount in the same way that you would a loan. You need not pay in EMIs. You can repay any amount of your choosing whenever you decide. On the other hand, if the lender demands repayment, you have to grant such a demand.
- Lower Rate Of Interest: OD against FD has lower rates than personal loans, ranging from 0.5% to 2% above the corresponding FD rate.
Steps To Avail The Overdraft Against Fixed Deposit Facility
The steps of acquiring OD against FD differ from bank to bank. Here is a general guide on how to avail of this facility:
1. Check Eligibility Criteria:
The criteria for getting OD against FD from banks are usually in terms of a minimum fixed deposit amount and a good credit record. Before proceeding with the application, it is important to consider these criteria.
2. Calculate OD Limit:
The overdraft limit is derived from the value of the fixed deposit. On average, banks provide an overdraft limit between 70% and 90% of the FD value. To determine your limit of borrowing, calculate the potential OD.
3. Submit application:
If the bank allows, apply for an overdraft against your fixed deposit. This application may comprise specific information like a reason for overdraft, the amount desired, and payment terms.
4. Documentation:
Please submit the required paperwork, such as identity proofs, address proofs and other details pertaining to the fixed deposit. The bank can additionally require a special overdraft facility application form.
5. Approval Process:
After submitting the application and documents, the bank will assess your qualifications and determine your fixed deposit value. If approved, the overdraft facility will be sanctioned.
6. Avail Funds:
Once approved, you can withdraw funds from a separate overdraft account or directly into your existing account. The disbursal may differ amongst banks.
7. Repayment Terms:
Be aware of the repayment conditions, such as interest rate, period, and cost. Mostly, a monthly repayment is essential, but nonconformance to the terms may lead to a penalty.
Conclusion
OD against FD is a great facility tool that helps individuals meet short-term necessities in the money domain without tarnishing fixed deposits. This facility combines the stability of fixed deposits with some of the features of overdrafts in terms of quick access to funds and lower interest rates.
Nevertheless, it is very important to understand the terms of use, conditions, eligibility criteria and rules of repayment before opening an overdraft against FD. If you want to know more about fixed deposits, it’s a good idea to check with trustworthy investment firms like Wint Wealth.
