Recurring Deposits (RDs) are one of the most reliable savings instruments, offering fixed returns and predictable outcomes. In addition to their primary purpose of disciplined saving, many banks and financial institutions provide a loan or overdraft facility against RD accounts. But does this facility come with every RD account? Let’s dive into the details.
1. Loan/Overdraft Facility Against RDs: What Does It Mean?
A loan or overdraft facility against an RD allows the account holder to borrow funds by using their RD balance as collateral. Instead of breaking the RD prematurely and incurring penalties, this facility helps meet immediate financial needs while keeping the RD intact.
2. Are Loans/Overdraft Facilities Available for All RD Accounts?
Not all RD accounts offer a loan or overdraft facility. The availability depends on the policies of the bank or financial institution. Here are some key considerations:
Scheduled Banks vs. Post Offices:
Most scheduled commercial banks provide loans or overdraft facilities against RDs.
Post Office RDs typically do not offer this facility.
Account Type:
Individual RD accounts are generally eligible for loan or overdraft facilities.
Joint accounts may require consent from all holders.
Minor RD accounts may not be eligible, as loans cannot be issued in the name of a minor.
3. Eligibility Criteria for Loan/Overdraft Facilities
To avail of a loan or overdraft facility against an RD, certain criteria must be met:
Minimum Tenure Requirement:
Banks may allow loans only after the RD has been active for a specific period (e.g., 6 months).
Loan Amount:
Generally, banks allow borrowing up to 80-90% of the total RD balance.
No Default in Payments:
The account holder must have made all RD installments on time without any defaults.
Bank-Specific Policies:
The availability and terms of the facility vary across banks.
4. Key Features of Loan/Overdraft Against RDs
Here’s what you need to know if your RD account supports a loan or overdraft facility:
a. Loan Amount:
The sanctioned loan amount depends on the total amount deposited in the RD. Most banks offer loans equivalent to 80-90% of the RD balance.
b. Interest Rate:
The interest rate on the loan is typically 1-2% higher than the RD interest rate. For example:
If your RD earns 6% annually, the loan interest rate may range between 7-8%.
c. Tenure:
The loan tenure generally matches the RD’s remaining maturity period.
Some banks allow flexibility in loan repayment terms, while others require the loan to be cleared before or upon RD maturity.
d. Overdraft Facility:
An overdraft works like a credit line, allowing you to withdraw funds as needed, up to a specified limit.
Interest is charged only on the utilized amount.
5. Benefits of Loan/Overdraft Against RDs
Avoid Breaking the RD: Keeps your RD intact, allowing you to earn the full interest upon maturity.
Quick Approval: Since the RD acts as collateral, the approval process is faster than unsecured loans.
Low Interest Rates: Loans against RDs typically have lower interest rates compared to personal loans.
No Impact on Credit Score: Using this facility responsibly does not affect your credit score, as the loan is fully secured.
6. Limitations and Exclusions
While loans against RDs are advantageous, there are some limitations:
Not Universal: Not all RDs are eligible for loans. For instance, post office RDs and minor accounts usually do not support this facility.
Limited Loan Amount: The borrowing amount is restricted to a percentage of the RD balance.
Interest Expense: The loan incurs additional costs in the form of interest, which may reduce the overall returns from the RD.
7. How to Apply for a Loan/Overdraft Against RD
The process is straightforward for banks offering this facility:
Visit Your Bank: Approach the bank where your RD is held.
Submit an Application: Fill out a loan/overdraft application form.
Provide Necessary Documents: These may include identity proof and RD account details.
Sanction and Disbursement: Upon approval, the loan amount is credited to your account.
8. Examples of Banks Offering Loan/Overdraft Against RDs
State Bank of India (SBI):
Offers loans up to 90% of the RD balance.
Interest rate is 1% higher than the RD rate.
HDFC Bank:
Provides an overdraft facility up to 90% of the RD value.
ICICI Bank:
Allows loans or overdrafts against RDs with competitive interest rates.
Post Office:
Currently, Post Office RDs do not provide this facility.
9. Factors to Consider Before Availing of a Loan Against RD
Cost vs. Benefit: Calculate whether the interest expense justifies avoiding RD withdrawal penalties.
Financial Discipline: Ensure that you can repay the loan on time to avoid complications.
Alternate Options: Explore whether other credit options, like personal loans or overdrafts, offer better terms.
Conclusion
Not all RD accounts offer a loan or overdraft facility, as it largely depends on the type of account and the institution managing it. However, for eligible accounts, this facility is a convenient way to meet urgent financial needs without breaking the RD.
If you’re planning to open an RD and anticipate requiring a loan facility, check with your bank beforehand. Understanding the terms and conditions will help you make the most of this feature while maintaining financial stability.
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