Fixed Deposits and their Benefits, know it all
The Covid-19 pandemic has wreaked havoc on the budgets of innumerable people who are dealing with several issues as a result of lockdowns, job losses, and reduced income. Many people would be looking for short-term funding options to help them get out of debt. Your fixed deposits (FDs) could come in handy if you need to arrange immediate liquidity.
You can use your FDs in a variety of ways to meet your financial needs during a difficult period. Here are a few suggestions.
The Overdraft against Fixed Deposits-
One of the quickest alternatives to borrow money from the bank is to take out a loan or an overdraft (OD) against an FD. According to the bank’s rules and conditions, your FD is utilized as collateral under the OD facility.
Banks typically allow overdrafts of up to 90% of the existing FD’s value, with OD interest ranging from 1% to 2% more than the underlying FD’s interest. For example, if your FD yields 6% per year, your OD will earn 7-8% per year.
The benefit of taking an OD against a Fixed Deposit is that you only pay interest on the portion of the OD that you use, and the interest is computed daily. Assume you take out a Rs 1 lakh OD at an interest rate of 8% per annum in a bank. You take Rs 10,000 out of your OD account, use it for 20 days, and then return the money to your OD account.
The bank will only compute interest on Rs 10,000 for a period of 20 days, which might come to Rs 43. As a result, an OD against an FD can be utilized as a regular liquidity vehicle to address short-term needs. Another benefit of having an overdraft is that you don’t have to worry about EMI payments every month. You have the option of depositing the outstanding balance whenever it is convenient for you.
It is, however, advisable to service your OD interest on a monthly basis. The duration of an OD is determined by the term of your loan. When you renew your Fixed Deposit, most banks allow you to renew your OD, and the interest rate on the OD is modified to match the interest rate on the renewed Fixed Deposit.
An OD against FD might be one of the greatest borrowing instruments if your liquidity requirement is transitory, such as due to a delay in salary, payment, or other reasons. The OD facility against FDs can be conveniently accessed through your online banking account, or you can apply in person at your bank branch using a printed form.
Pre-closing a Fixed Deposit-
If you have a larger money requirement and are unsure when you will be able to overcome the liquidity issue, you may want to consider pre-closing your existing FD. However, before closing your FD, be aware of the penalty fees imposed by your bank.
Penalty penalties range from 0.5 per cent to one per cent of the effective interest rate on the fixed deposit at the time of the early withdrawal. Make thorough calculations based on your bank’s terms and conditions before pre-closing an FD. Some banks also allow you to take a portion of your FD without having to liquidate the full investment
Pre-closing and FD could be used as a last resort to overcome a liquidity shortage in an emergency, and it could be a better option than taking out a loan, which could come with a higher interest rate and processing fees, as well as a longer processing period.
More significantly, if your salary takes a long time to return to normal, a loan like this could add to your financial woes. However, you should be aware that pre-closing an FD may have an impact on the financial goals associated with it; as a result, you should take the necessary actions as soon as your finances have stabilized.
To summarise, FDs can serve as much more than just an investment vehicle; they can also serve as superb liquidity solutions in a need.
However, the terms and conditions linked with various FD products and facilities may vary from bank to bank, especially because most banks have recently decreased their FD rates due to the economic consequences of the pandemic.