Gold Loan OR Overdraft Against FD: Which is Better?

Gold loans and overdrafts against Fixed Deposits (FD) are two effective ways to unlock liquidity from your existing assets without having to sell them. A gold loan allows you to borrow money by pledging your gold jewellery or coins as collateral, making it a quick and flexible option to meet urgent financial needs. 

On the other hand, an overdraft against FD enables you to borrow funds against your fixed deposit. It enables you to access the invested amount while continuing to earn interest. Both options provide easy access to funds at lower interest rates compared to unsecured loans. These can help manage your short-term financial requirements without disrupting your savings or assets. 

When deciding between a gold loan and an overdraft against FD, it’s essential to consider key factors. With a gold loan, you can usually borrow up to 75% of your gold’s value, as per guidelines issued by RBI. You can consider this option if you need substantial funds quickly. However, the interest is applied to the entire loan amount from the outset. 

An overdraft against FD, allows you to borrow against your fixed deposit without breaking it. The interest is only charged on the amount you withdraw, offering more flexibility if you need funds gradually. The choice depends on your unique financial needs. If you require a lump sum, you can consider getting a gold loan. Meanwhile, if you prefer the flexibility of withdrawing multiple times, as and when required, an overdraft against FD can be a good choice. Let’s understand these options in detail.

We know how important that family heirloom is. Selling it is not an option, but you can get a loan against the precious metal! You can get a short-term loan from any financial institution by keeping your gold as collateral. If the purity of your gold is between 18 and 24 karats, you can get a loan against it for a tenure of six to twelve months. 

Gold loans are flexible and one of the most sought-after forms of secured loans. They provide multiple repayment options, right from monthly EMIs to bullet payments. One can select a repayment process that is more comfortable for them. Even though you can get this facility at a local jewellery store, it is advisable to get your gold loans from registered banks and NBFCs. This ensures the security of your gold and leaves little to no scope for getting cheated in the process. A fair valuation and good loan-to-value ratio help you get a better loan. Hence comparing the rates and offers of multiple financial institutions before getting a loan is particularly important. If this seems like a feasible option to you then do read 5 Things to Consider Before Taking a Gold Loan before you proceed.

Instead of withdrawing your FD prematurely and paying the penalty, consider getting an overdraft against your FD. Under this, you can get money up to a prefixed amount against your deposit to settle unexpected expenses while continuing to save up on your FD. 

It is beneficial for those who have a low credit score or those who do not meet the eligibility criteria to get a loan. As your FD is held as collateral, you can get this facility quite easily. Even the interest rate on these credits is lower than most other credit options. The interest rates are usually 1%-2% higher than the FD rate. 

Deposit rates offered on an FD are about 5% to 10% p.a. on average. So, your repayment interest will usually be around 6% to 11% p.a. Furthermore, as this is an overdraft facility, the interest will be charged only on the amount used, not on the entire sanctioned amount. The tenure for the loan will be equal to that of the FD. If your deposit held as collateral matures in 5 years, then your overdraft facility will also end in 5 years.

• Borrowing Limit

With an overdraft against your fixed deposit, you can typically borrow up to 90-95% of the FD value. This means if you have a fixed deposit worth ₹1 Lakh, you may get an overdraft of up to ₹95,000. For a gold loan, lenders offer up to 75% of your gold’s market value. If your gold is valued at ₹1 Lakh, you can borrow up to ₹75,000, depending on the lender's policy.

• Interest Rate

The interest rates for overdrafts are generally very low, often slightly higher than the interest your FD earns. For example, if your FD earns 6% interest, the overdraft rate could be around 7% to 8%. This makes it a cost-effective borrowing option. Gold loans come with competitive interest rates, but they are usually higher than FD overdrafts. Rates can vary from 8% to 12%, depending on the lender, loan amount, and gold value.

• Documentation Process

The process to get an overdraft against your FD is straightforward. You’ll need minimal documentation, usually limited to your FD details and basic KYC documents like PAN and Aadhaar cards. Gold loans require a bit more paperwork. In addition to your KYC documents, the lender will also evaluate and appraise the gold you pledge. The process is still fairly simple, but it includes an extra step for gold valuation.

• Flexibility

This option is highly flexible. You only pay interest on the amount you use, not the entire overdraft limit. For example, if you have a ₹50,000 overdraft limit but you only use ₹10,000, interest is charged only on the ₹10,000 withdrawn. This gives you more control over your borrowing. When you take out a gold loan, interest is charged on the full loan amount right from the start. Even if you don’t use the entire loan amount immediately, you’ll still be charged interest on the whole sum.

• Tax Benefits

There are no direct tax benefits for an overdraft against an FD. You’re borrowing against your own money, so no tax incentives apply in this case. While there are no general tax benefits for a gold loan, if the loan is used for business purposes or certain expenses like purchasing property, the interest paid on the loan may be tax-deductible. This is as per the Income Tax Act, 1961.

• Tenure

The tenure of the overdraft is usually linked to the maturity date of your FD. You can keep using the overdraft as long as your FD is active. This allows you to enjoy flexible repayment terms. Gold loans come with a fixed tenure, typically ranging from 3 months to 3 years. You may have the option to renew the loan upon maturity, but this depends on the lender’s policy.

• Loan Repayment

You can repay the overdraft at your own pace, as long as the FD remains active. The repayment schedule is quite flexible, allowing you to repay the loan quite easily. Repayment for gold loans is typically done through EMIs or lump-sum payments at the end of the tenure. The repayment terms are more structured compared to an FD overdraft.

• Security of Assets

There is no risk of losing your fixed deposit as long as you repay the overdraft. Your FD remains safe and continues to earn interest while you borrow against it. However, in case you fail to repay the amount, the financial institution may recover the dues from the deposit and give you the remaining amount. With a gold loan, your gold is used as collateral. If you fail to repay the loan, the lender may sell the pledged gold to recover their money. This makes timely repayment essential to avoid losing your gold.

When deciding between an FD overdraft and a gold loan, it's important to carefully evaluate your financial situation and needs. Both options offer quick access to funds at competitive interest rates, but they come with different levels of flexibility, borrowing limits, and repayment terms. An FD overdraft provides more flexibility with interest charged only on the amount you use, while a gold loan allows for a higher loan amount but requires regular repayment. Consider your assets, financial goals, and repayment ability to choose the option that best suits you.