5 MinsDec 8, 2021
Salma needs Rs 1.5 lakh for a wedding in her family. She has a Fixed Deposit (FD) of Rs 4 lakh with Axis Bank, and she also qualifies for a personal loan. She was in two minds on whether to liquidate her Fixed Deposit or to take a Personal Loan.
She called up her relationship manager at Axis Bank for advice and was offered a third alternative: 24x7 Overdraft Against Fixed Deposit.
She can apply for this online and get it sanctioned seamlessly and instantly.
If you, like Salma, also have saved funds in a Fixed Deposit, you can leverage it in case of any need. Let us see how and what are the benefits.
What’s an overdraft facility?
An overdraft is a short-term loan facility. It is most often used by businesses to tide over short-term cash flow issues. Salaried individuals can also avail of it as an alternative to breaking up their FDs if they need funds for a limited duration.
For individuals like Salma, generally, an OD facility is extended on their FDs. Salma has a Rs. 4 lakh FD, and she needs Rs. 1.5 lakh for the wedding expenses. She can apply for an overdraft instead of breaking up her FD and losing interest on
the whole amount. This is likely to be sanctioned easily.
[Also Read: Loan Against Bank Fixed Deposit: All You Need To Know]
How does it work, and how is it different from a personal loan?
The 24x7 Overdraft Against FD provides an OD facility up to 85% of the value of the FDs held with Axis Bank. The interest rate is two per cent more than the interest
the bank pays on its FD. For example, assuming Salma's FD of Rs. 4 lakh is for two years and she earns an interest rate of 5.40% per annum. For her 24x7 Overdraft Against Fixed Deposit she will have to pay an interest of 7.40%. But the best
part of an OD is that she will be paying interest only on the actual amount utilized and for the tenure of the utilization. The rest of the amount will continue to earn interest.
On the other hand, if she were to take a personal loan, the interest rate would be higher than the rate on overdraft facility. And if she were to break her FD she would lose out on the
entire interest, which she could have earned, because there is no option of withdrawing or redeeming the FD partially.
There are some other key differences between a personal loan and an OD facility.
- OD against Fixed Deposit is a great way for people who don’t have a credit history to get funds. In the absence of a credit history and credit score,
such borrowers may find it difficult to get a personal loan
- The application and documentation process is much more straightforward than a personal loan.
- ODs don’t have a system of EMIs. As long as the FD is in force, borrowers can repay at their convenience.
- As mentioned earlier, interest is only charged on the actual amount of the OD utilized and the utilization tenure.
- Unlike personal loans, no-prepayment penalties are applicable on OD facilities.
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