Overdrafts against fixed deposits are one of those quiet banking features that most people overlook until a cash crunch hits. Instead of breaking your FD, losing interest, and resetting your savings plan, you can borrow against it at a relatively low cost, keep the FD running, and still meet your immediate need for money. The key is to understand when this option genuinely saves you money and when it is better to simply redeem the deposit.
How an overdraft against FD works
When you take an overdraft against an FD, the bank extends a limit linked to your deposit, usually in the range of 75-90 percent of its value. The FD itself is marked as security and continues as before. You are charged interest only on the amount you actually withdraw and not on the full limit. For existing customers, many banks offer this facility almost instantaneously through net banking or apps with minimum or no paperwork, and without checking your credit score, since the risk is covered by the FD.
Why it is often better than breaking the FD
Breaking an FD before maturity usually means a lower interest rate, a penalty, and the loss of the compounding you had planned for. In the case of an overdraft, the FD continues to earn interest at the contracted rate, while you pay a relatively small spread over that rate on the borrowed amount, often around 0.5-2 percent higher. This cost is normally much lower than you'd pay on a personal loan or a revolving credit card balance for short spells of borrowing. It works especially well for temporary gaps in cash flow, medical expenses, urgent home or car repairs, or delays in expected income.
When an overdraft may not work in your favour
So, if you need most or all of the FD amount and know that you will not be able to repay soon, the interest on the overdraft can become expensive over time. In this scenario, breaking the FD and restructuring your savings may make more sense. Overdrafts against FDs are best treated as a short-term liquidity tool rather than a long-term loan. Banks also reset the interest rate on renewal when the FD matures. If your FD is pledged and you go on renewing it on auto-pilot without checking current rates, you may end up holding a low-yield deposit because it's linked to your overdraft.
How to get the most value from an overdraft against FD
We use the overdraft facility only when we most need it and pay back as quickly as possible, even if in part-payments when you have surplus cash. Monitor the outstanding on a regular basis; small balances that remain uncleared keep accruing daily interest and may remain unnoticed. Know what spread your bank is charging over the FD rate. Know if better terms are available for larger deposits or for priority customers. If your bank allows a partial withdrawal from FDs or offers short-term loans at comparable rates, compare the total cost before deciding whether to use the OD or make an early withdrawal from FDs.
Frequently Asked Questions
When is overdraft against FD the cheapest option?
It's mostly the cheapest option when you need money for a limited amount of time and are sure of paying it back soon. In this case, the interest you save by not breaking the FD and losing its higher rate typically outweighs the interest you pay on the overdraft.
Does taking an overdraft against FD affect my credit score?
Normally, no. Because the FD is taken as security and the bank's risk is low, this facility is usually treated as different from an unsecured loan and is not shown on your credit file. However, this may vary in practice and it is worth checking with your bank.
Can I renew or close my FD if it's pledged for an overdraft?
You can renew the FD as usual, provided you follow the bank's terms for the overdraft. To close or prematurely withdraw the FD, you first have to clear any outstanding overdraft and remove the lien. Once that is done, the FD can be broken or redeemed like any other deposit.
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