The second wave of the corona epidemic spoiled the economic condition of the people. Income has decreased, the need for money has increased. In this situation you can do loan or overdraft against FD. But first know these things.
The second wave of the COVID-19 pandemic has severely affected the finances of many, facing more than one challenge due to the lockdown, job losses and loss of income. But, the pace of the vaccination program is picking up and the government has set a target to vaccinate everyone by the end of this year. During this situation, many people are looking for short term funding facilities to overcome the immediate financial hardship. For this purpose, your Fixed Deposits can prove to be very helpful in arranging for instant liquidity. You can use your FD in more than one way to meet your financial needs during these tough times. Here are some options to consider.
Overdraft on FD
Loan Against FD or Overdraft (OD) is one of the fastest ways to borrow from banks. Your FD is used as collateral under the OD facility, subject to the terms and conditions of your bank. Notably, banks allow overdrafts up to 90% of the current value of FDs and the rate of interest on OD facility is 1-2% higher than the interest paid on FDs held as your collateral. For example, if your FD gives 6% annualized return, an interest of 7-8% per annum will be charged for the OD.
The advantage of taking OD against FD is that interest is charged only on the amount you use from OD, and the interest is calculated on a daily basis. For example, suppose you are availing OD facility of Rs 1 lakh from a bank at the rate of 8% per annum. You withdraw 10,000 rupees from your OD account, and use this amount for 20 days, and then get the money deposited in the OD account. In this situation, interest will be charged by the bank on the amount of Rs.10,000/- only for a period of 20 days which will be around Rs.43/-.
Hence, OD can be used as a regular liquidity instrument in lieu of FD for short term requirements. Another advantage of overdraft is that you do not have to worry about monthly EMI obligations. You can deposit the outstanding amount as per your convenience. But, it is advised that you pay your OD interest every month. The tenure of the OD will depend on the maturity period of your loan. When you get your FD renewed, usually banks offer the facility of renewing the OD facility as well, and the interest rate on the OD is re-adjusted as per the interest rate of the renewed FD.
If your liquidity requirement is only for a short period of time, such as delayed salary, delayed payment etc., then OD against FD can prove to be the best way to borrow. OD against FD facility can be easily availed from online banking account, or you can also do the same by visiting your bank branch by filling up the written form.
Premature closure of FD
If your requirement is huge and you are not sure when you will be able to come out of this liquidity problem, you can also consider premature closure of your existing FD. But before closing your FD, you must know the penalty charges levied by your bank. Different banks charge a different amount for the penalty, but it is usually 0.5% to 1%, which is reduced to the effective interest rate applicable to fixed deposits at the time of premature withdrawal.
For example, suppose you have got an FD of Rs 1 lakh for a tenure of 2 years at 6% per annum interest rate, on maturity of which you will get Rs 1,12,649/-. But after 1 year, you suddenly need money and you plan to close your FD prematurely. Let’s say your bank’s respective card has an interest rate of 5% (i.e. interest rate for FDs of 1 year tenor or booked rate, whichever is lower) at the time of opening the FD account and for premature closure of the FD. If the penalty is 0.5%, now the effective interest rate (5%-0.5%) will be 4.5% and your maturity value will be Rs 1,09,362, if you prematurely close your 2-year FD after 1 year . On your investment of Rs 1 lakh, you will be able to earn interest of Rs 9,362/- as against Rs 12,649/-, so that you can meet your requirement.
However, before premature closure of the FD, you must do the calculations as per the terms and conditions of your bank. Some banks also allow partial withdrawals without liquidating the entire investment; You can ask your bank about this facility. But premature closure of an FD should be used only as a last resort to resolve liquidity in an emergency and it can prove to be a better idea than taking a loan, for which you have to pay higher interest rate and processing charges. , and may also take a long processing time.
