Advantages of FD | Benefits of Fixed Deposit: Not only interest on FD, you can take overdraft and loan, not only interest is available on FD, you can also take overdraft and loan, know how?
You can also do loan and overdraft against FD
- There are many ways to meet financial needs.
- Loan against FD or overdraft is the easiest and fastest solution.
- You can also use credit card facility on FD.
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 immunization program is picking up pace 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.
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 and 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 . You will be able to earn an interest of Rs.9,362/- on your investment of Rs.1 lakh 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.
More importantly, if it takes a long time for your income to return to normal, this type of loan can complicate your finances even more. At the same time, you must also understand that premature closure of FD also affects your financial goals associated with it; Therefore, you are advised to take urgent steps as soon as your finances stabilize.
credit card on FD
If you are looking to borrow for your regular spending needs, you can talk to your bank about the credit card facility on your existing FD. These secured credit cards work just like regular credit cards. The user of the card is usually provided with an interest free period of 50 days to repay the amount used. But, in case of non-payment of dues by the due date, 2% to 3% monthly interest may be charged by the bank. You can take a credit card against your FD in cases where you want an interest free credit period. But you are also advised to clear your dues within this period to avoid interest charges.
Lastly, FDs are much more important than investment instruments – they can also be used as a liquidity tool during emergencies. But the terms and conditions associated with different FD products and features may differ from bank to bank, and it is also true that recently, most of the banks have closed their FDs as a result of the economic collapse in the pandemic. rates have been reduced. Investors are advised to consider these factors carefully before taking any decision.
(The author of this article is Adil Shetty, CEO, BankBazaar.com)
(Disclaimer: This information is being given on the basis of expert reports. Markets are subject to risks, so take your own advice before investing.) (This article is written for informational purposes only. It is for investment purposes only.) should not be construed as financial or other advice)
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