Funds crunch: Overdraft against FD or personal loans? Know what option to choose

The post-Covid world has seen a lot of layoffs and salary cuts. It is quite obvious that people would have faced a shortfall in their monthly expenses and other funds. To cover the shortage of funds, banks offer two kinds of facilities to salaried individuals- Overdraft Facility on your Fixed Deposit or Personal Loan.

Personal loans are unsecured loans offered by banks as it doesn’t require the individual to submit a collateral. It is provided on the basis of some major criteria like Income level, repayment capacity, CIBIL score, etc. While taking a Personal Loan one must keep in mind that a fixed EMI has to be paid timely for the duration of the tenure.

Expert view

“Though personal loan provides immediate relief, they come with a fixed EMI and repayment tenure. Once disbursed, they require a new application for accessing more credit and they also attract pre-payment penalty if the funds disbursed are not fully utilized and you want to pre-close the loan,” said Anil Pipala, founder & CEO, Vivifi India.

He further added, “A personal loan should be opted when there is an identified need and the repayment requirements are generally longer. They are generally available for a tenure of 12 to 60 months and are larger ticket size.”

Alternatively, banks also give an overdraft facility against fixed deposits. Depending upon the bank, individuals can withdraw around 85%-95% of their fixed deposit amount. Interestingly, banks do set the limit of overdraft but they charge the interest only on the actual amount withdrawn. Generally, the interest charged on your OD account is 1%-2% above the rate of interest provided on your FD. In case you fail to repay the amount, the bank gets a claim over your deposit automatically.

Pipala explains, “Overdraft should be opted when there is an emergency and short-term need for the money.” The process for applying for the overdraft facility is simpler as you don’t need to process your entire application again to draw some more money out, and your line remains active for future use at minimal annual/usage fees.

Different needs

Overdraft facility and personal loan are two different products catering to different requirements for the same customer profiles. Personal loans are generally for larger ticket sizes whereas the overdraft facility is for shorter-term smaller amount emergency needs.

For people facing cash crunch or emergency, Pipala recommends selecting the product that best suits the need of an individual, that is, a personal loan for funding a large ticket need and an overdraft for an emergency need.

“Refer to the most important terms and conditions of the loan agreement and get clarity on all kinds of applicable fees and penalties,” he further advised.