Overdraft confusion

General
1

I have a Doubt
If I want To Create a OD Against my FD which i Booked On 5% 1 year Ago, and OD Intrest Rate is FD Rate+1%
Then Will that intrest Will Calculate as 5+1=6% or Current FD Rate 6+1=7%
And Will I Still get that 5% Intrest on FD even after Creating OD Against it?
If Yes Eventually my Cost of Funds Will be 1% am i Right?

2

Say you placed a FD at 5% today and seek and OD which the bank will give at FD + 1%. Then your OD rate will be 5+1% = 6% until the FD rate remains 5%.
Now after one year, you renew the FD at 6%, the bank will automatically charge the OD at 6+1% = 7%.

The OD rate is linked to the pledged/under lien FD rate +1% so whenever the specific pledged FD rate changes, the OD rate changes as well.

You will continue to get the FD Interest based on what option you have chosen. If you have chosen Interest payment is on maturity, you will get the interest portion on the maturity, many, chose quarterly interest payout, which means, every quarter you will get interest payout.

Yes, netting off interest from FD against interest cost on OD, your net cost will be 1%. Dont think your cost of funds is 1%. The cost becomes 1% only when you consolidate, but when you do a transaction, the cost of funds will be 7%.

Not sure If I am able to express this clearly, but here you go.
Let us say you use the OD - you pay 7%. To me the cost of funds is 7%.
I have also invested my funds in FD, this is my income at 6%. Only when you net off this income against the OD, your cost will be 1%.

Assume, I have another FD which gives me return, if I net off this, I will be in surplus. Will I then call my cost of funds is zero, I do not think so. Hence I will be little sceptical in saying my cost of funds is 1%.

Other points.

  1. Do remember, interest on OD is charged on a monthly basis and capitalised, whilst interest on FD will compound on a quarterly basis only (if you have chosen interest on maturity). Hence there might be a marginal increase in cost due to monthly charge of interest, but it will be marginal.
  2. OD is a great product when you want to use the funds for few days or few months, you could repay the same and interest on OD is calculated only when it is used.
2 Likes