There are times when we need instant money, we think of taking a loan. Or we think of breaking the fixed deposit to get instant money. But there is another option to go for overdraft against your fixed deposit. In this article, we will see how overdraft is way better than taking a loan. Let’s learn what is overdraft. How does it work? Who can apply? And, what are the documents required to apply?
What is an overdraft?
Overdraft is basically is an extension of money from the bank when your account reaches zero. The bank allows the customers to borrow some set amount of money. It can be useful to get rid of fees for bounced or returned payments. Some bank offers free overdraft facility also.
Also, let’s understand one more advantage of overdraft. Suppose you have a sum of one lakh rupee in your account and you need a sum of one and half lakh rupees to withdraw. Then your bank allows you to borrow this extended sum of money after some document verification process. Hence we can withdraw some extra amount without even taking any loan.
Who can provide the overdraft facility against fixed deposit?
Most of the banks and financial institutions avail of this facility of overdraft. The institution can be government, private, small financial institution, etc. There are only a few banks that do not avail of this facility.
There are two types of overdrafts facility available at almost every bank and other financial institution.
- Secured – In secured accounts OD, the bank gives this facility against some collateral as a security in case you are not able to pay it later.
- Non-secured – In non-secured OD, the OD is not given against any collateral. This is given by the verification of your account transactions. And it depends on the credibility.
Overdraft v/s Loan
The loan is a fixed amount that is bound to a fixed time period where an overdraft is variable is not even a time-bound facility. You can not pay your loan amount before the time period is decided. You additionally have to pay the penalty to pay it early. But in an overdraft facility, you can pay back the bank as soon as you have completed your financial tasks without any penalty on it. Isn’t it the big advantage to prefer an overdraft facility instead of taking a loan?
Interest to be paid
As we discussed above loan is a fixed tenure facility. Thereby we pay the interest for a certain amount of time and that too way greater than the interest we pay in an overdraft facility. As we know overdraft is for only the time period that we decide. As long as you are using the overdraft facility only for that time you need to pay the interest. The interest in OD facilities is comparatively less than the loan facilities. This lower interest rate thus helps you to save money and the money saved is the money earned.
A personal loan for shortly can hit your credit score. In the case of the OD facility, it doesn’t affect your credit score at all. In fact, it helps you improve your credit score if you use it sensibly and pay it off regularly.
It is well-known that a Good Credit Score is a sign of good financial health. It enhances your chances for future loans and nowadays it also makes you eligible for some exclusive schemes. These schemes help in extra savings in your future purchases or provide a bigger limit on the purchase made using EMIs.
Moreover, a good credit score also improves your chances of availing of an overdraft from your bank. The banks are more willing to provide an overdraft facility to those customers who possess a good credit history on their documents.
When to close a Fixed Deposit!
During a cash emergency, A pre-mature closing can help you a lot. The best option is to not close the fixed deposit and earn interest on it. Besides you can take OD facility against it. But if you need to break the fixed deposit prematurely there are certain things you keep in mind. Premature withdrawal of an FD means to get the amount before the end of its maturity period. Bank levies a certain amount of charges on the withdrawal of premature fixed deposits. These charges are known as penalties. And these charges may vary from bank to bank. For example, HDFC bank and Bajaj finance apply penalty charges of 1% whereas SBI and ICICI bank keeps it to 0.5% to 1%.
PNB Housing finance levies charges of 4% on deposits up to 6 months and 1% for above six months.
There are two ways to execute the process of closing. You can either do it online or you can visit your bank branch to do it offline.
If a customer withdraws the FD before the maturity period, there is a loss of earning the benefits of FD interest rates like losing upon long-term savings. This can create a blow to your long-term financial goals.
Recently, Axis bank has removed the penalty on Pre-mature withdrawal on all new retail terms deposits which are booked on or after December 15, 2020. This facility is applicable on the 2-year term deposits. It will be applicable if they are fully withdrawn within 15 days of the investment.
So, there is an overdraft option available to us in case of a sudden financial need. This overdraft is a better option than a personal loan or premature braking of a fixed deposit. However, the overdraft facility also incurs a cost with it in the form of interest to be paid. Hence, it is always better to plan your finances effectively and mitigate such scenarios where a sudden need for money may arise. Also, It is advisable to keep a small fraction of your savings in a readily available liquidity form. This can assist you in the time of an unexpected need for money and hence save you from any debt.
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