Overdraft against Fixed Deposits

What is a Fixed Deposit?

A Fixed Deposit is a type of account that offers a fixed and guaranteed rate of interest on your savings or investment. They are either termed as Fixed Deposit accounts or as Time Deposits. Such accounts are offered by almost all banks in Malaysia.

Fixed Deposits offer significantly higher rates of interest than savings accounts while minimizing the risk associated with other high-risk investment products; this accounts for their popularity with Malaysians even today.

What is an Overdraft?

An Overdraft is a credit facility allowed to bank customers to draw more than what is in their account(s) up to the credit limit allowed by the financial institution. Overdrafts are available both in the form of unsecured (without collateral) and secured Overdrafts. Secured Overdrafts allow for favourable interest rates for the borrowers.

Overdraft against Fixed Deposits (O-FD)

OverDraft Against Fixed DepositsAn Overdraft against a Fixed Deposit is a type of a secured overdraft. Here the Overdraft is secured against the Fixed Deposit, i.e., the amount in the Fixed Deposit provides the bank with the security for releasing credit to the customer in the form of the Overdraft.

Benefits

* In most cases a secured Overdraft like an Overdraft against a Fixed Deposit provides the borrower with a more favourable rate of interest than in the case of an unsecured Overdraft.

* The borrower can access emergency cash without having to break the Fixed Deposit.

* The Fixed Deposit continues to earn interest. This can be offset against the interest charges on the Overdraft.

* Most O-FD products like Citibank’s “Overdraft against Time Deposit” charge interest only if the funds are used.

Islamic versions of the Overdraft against Fixed Deposit products are also available. These could be based on the Islamic principle of Wakalah (or Agency).

Points to note

* In accordance with the Rules of Association of Banks in Malaysia, most banks (some products do not carry this fee) levy a commitment fee of up to 1% on the un-utilised portion of the approved overdraft limit in excess of RM250,000.

* Once an Overdraft is availed against the Fixed Deposit, check whether Fixed Deposit interest earnings are based on the entire amount in the Fixed Deposit or the remaining Fixed Deposit amount minus the Overdraft availed.

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