How fixed deposit can be used as collateral for overdrafts, other financial products

When we desire to invest our surplus money, a fixed deposit (FD) is the first thing that comes to our minds. As one of the most traditional products of investment, fixed deposit is immensely popular and trusted amongst investors.

Everything has made FDs a remarkable investment option, from guaranteed returns and hassle-free procedures to ease of investment. But FDs are way more than just a mere investment avenue. In other words, the benefits of a fixed deposit are much more than you can ever imagine!

Whenever there’s an emergency and a sudden requirement for cash, we tend to seek loans against different assets. But did you know that you can also use a fixed deposit as collateral for loans and other financial products? Well, you can seamlessly pledge your fixed deposit and avail overdraft against it from your bank.

Rather than breaking and drawing your FD prematurely, you have the opportunity to acquire an overdraft against it. This article will give you more informative insights into FD as collateral and the benefits of acquiring the same. Please keep reading until the end to learn more about it. Let’s dive in!

Overdraft Against Fixed Deposit – An Overview

An overdraft against a fixed deposit is a secured loan where the customers pledge their fixed deposit as collateral. And in return, they can avail of a loan amount.

The loan amount usually depends on the amount of the fixed deposit. Please note that the amount of the loan can go up to 90%-95% of the deposit amount.

The loan’s interest rate is usually 1-2% above the fixed deposit interest rate. However, the interest rate is likely to vary from one bank to another.

Requirements of Applying for an Overdraft Against Fixed Deposit

If you apply for an overdraft against a fixed deposit, you must fulfill some requirements. Some of the most prominent ones include:

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Fixed Deposit

As you need to keep your fixed deposit as collateral, it’s imperative for you to hold an FD account.

FD with Equal or Greater Value Than Your Loan Amount

The value of your fixed deposit should equal or exceed the amount you are borrowing. For instance, if you are borrowing an amount of Rs. 5 lakhs, then your FD should comprise an equal or greater value.

Similar Tenure for Loan and FD Maturity

Tenure for FD is nothing but the period over which your fixed deposit investment matures. Likewise, the tenure for an overdraft against a fixed deposit is the period over which you need to repay your borrowed amount.

Please note that the tenure for your FD should be the same or more than your loan tenure. In other words, you are required to repay the loan within which your fixed deposit matures.

Other Investments

A overdraft against FD usually works better when you have multiple investments. When you have a single FD that otherwise generates cash, it might be risky to put it at stake. Before you borrow, you should ensure that you have several investments that yield excellent results.

Fulfilling the Eligibility Criteria and Other Application Formalities

Like all other loans, you need to fulfill the eligibility criteria before applying for this option. Make sure you go through the application procedure carefully and submit the basic documentation as required.

Benefits of Acquiring Loans Against Fixed Deposits

Some of the most commendable benefits of acquiring loans against fixed deposits are:

  • While the loan is secured, it comes with simpler eligibility requirements in comparison to unsecured loans.
  • To acquire this loan, you won’t need to break or liquidate your fixed deposit prematurely.
  • The interest rates are pretty low as you need to submit your FD as collateral.
  • This loan doesn’t have any additional requirement of processing or handling fee.
  • Since the payment tenure is equivalent to the FD’s maturity tenure, the payment procedure is quite flexible.
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If you are searching for a loan to meet a certain financial emergency, you can always consider your fixed deposit. If you desire, you can also keep your FD as collateral for an education loan. And while most banks charge lesser interest rates than other loans, availing of this type of loan is truly beneficial.

For more information regarding acquiring overdraft against fixed deposit, you can get in touch with AU Small Finance Bank.

Frequently Asked Questions

What is the maximum amount that I can borrow against a Fixed Deposit?

Most banks and non-banking financial institutions usually provide 70%-90% of the Fixed Deposit as a loan.

What is the rate of interest for loans taken against Fixed Deposits?

The rate of interest on loans taken against Fixed Deposits is generally based on the interest rate offered on the Fixed Deposit itself. However, most banks provide an interest rate of 2%-3% more than the Fixed Deposit rate.

Can senior citizens apply for an overdraft against a Fixed Deposit?

Senior citizens can also apply for an overdraft against a Fixed Deposit. Anyone with an FD account can easily avail of this facility.

What is a Fixed Deposit lien?

Lien is nothing but a typical charge that banks usually create. Under FD lien, banks get automatic claims over the deposit against which a loan has been taken. However, you should note that only some banks are involved with the practice of this feature.

Do I need to pay any additional charges for an overdraft against a Fixed Deposit?

You need not pay any additional charges other than the processing fee for availing of the overdraft against FD. Please note that the interest rate is usually 2%-3% above the applicable card rate.

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