To pay cash or loan on fd which is better

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

17 June 2015 Question is- my friend is taking a home loan of Rs.10 lacs and property value is 20 lacs including registration etc. Now bank has sanction him Rs.10 lac and he has to pay balance Rs.10 lac out of his pocket.
He has fds of Rs. 15 lacs.
Now he has two options.
1. Break fd and pay Rs.10 lacs.
2. Bank offered him a offer that is take od on fd at same rate of fd and at same amount of fd. I.e.Rs.10 lac @9% on lien of 10 lacs' fd (since he was x-staff family member of bank).
Here it clear that bank will keep interest and release fds in future when he wil pay rs.10 lacs.
Which otion he should opt and WHY ?? Please give answer with detailed examination..
Loan emi etc are not dependent on this 10 lacs.

Querist : Anonymous

Querist : Anonymous (Querist)

17 June 2015 Please avoid taxation point of view as friend is not in tax bracket.

Querist : Anonymous

Querist : Anonymous (Querist)

17 June 2015 Please avoid taxation point of view as friend is not in tax bracket.

CA. Sunil Gokhale

CA. Sunil Gokhale (Expert)
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17 June 2015 Taking overdraft against FD is better than breaking the FD particularly when the rate for OD is same as the rate on FD. The interest on the balance Rs.5 lakh FD will also help him to reduce the amount of OD balance and save on interest on the OD while he continues to earn interest on full Rs.15 lakh FD. Another advantage is that whenever he has any spare money he can deposit it in the OD account to save interest on the OD but he will continue to earn interest on the FD. If he needs money he can withdrawn from the OD and pay interest only on the amount withdrawn.

Querist : Anonymous

Querist : Anonymous (Querist)

18 June 2015 Thank you sunilji for your quick response. But don't you think that in that way it will increase cost of property indirectly. If he has fds then why should he take loan? Of course breaking fd will be the cause of future interest loosing opportunity cost,but this opportunity benefit of interest is of bank and not of customer.
Kyoki in fd ka interest to bankwala le lega,iske bajay fd cash karale to kya ye saving in indirect purchase cost of property nahi hogi??

Asha Kanta Sharma

Asha Kanta Sharma (Expert)
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02 August 2025 Great question! Let’s break down the scenario carefully to help your friend decide:

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### Situation Recap:

* Property value = Rs. 20 lakhs
* Bank loan = Rs. 10 lakhs @ FD rate (say 9%)
* Your friend has Rs. 15 lakhs in FDs.
* Needs to pay Rs. 10 lakhs balance from pocket.

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### Options:

1. **Break the FD and pay Rs. 10 lakhs directly.**
2. **Take an overdraft (OD) against the FD for Rs. 10 lakhs @ same interest rate as FD.**

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### Analysis:

#### Option 1: Break FD and pay cash

* Your friend loses interest on Rs. 10 lakhs for the remaining FD period.
* No loan or OD interest cost.
* Immediate reduction in property cost as Rs. 10 lakhs is paid upfront.
* No liability or risk of OD interest compounding.
* Simpler and no ongoing financial obligation on that Rs. 10 lakhs.

#### Option 2: OD against FD

* Bank keeps the FD as lien and gives Rs. 10 lakhs OD.
* Interest on OD = Interest earned on FD, so effectively no interest cost.
* Your friend **continues to earn interest on full Rs. 15 lakhs FD** (including Rs. 10 lakhs which is lien).
* OD is repayable, but your friend can repay at any time without penalty.
* Keeps liquidity intact — he can use the OD amount anytime if needed.
* If your friend deposits extra funds in OD account, interest cost reduces.

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### Why OD against FD is generally better?

* **Liquidity:** Your friend can access the Rs. 10 lakhs anytime by repaying OD.
* **No opportunity cost:** Interest on FD compensates interest on OD, so no net loss.
* **Flexibility:** If he gets extra money, he can reduce OD interest.
* **No breaking of FD penalties or loss of compounded interest.**

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### But you raised a valid point — isn’t he indirectly increasing property cost by paying interest to bank?

* Actually, here the interest on OD is same as FD interest earned. So no *extra* cost.
* Bank keeps FD interest, but your friend also pays equal interest on OD — net effect zero.
* If he breaks FD, he loses the compounding interest and future interest benefit.
* So, breaking FD means giving up guaranteed returns for no interest saving on loan/OD.

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### Summary:

* **If your friend wants liquidity and no loss of interest:** go for OD against FD.
* **If he wants to avoid any liability and interest cost, and doesn’t need liquidity:** break FD and pay cash.

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### My personal recommendation:

**Take the OD on FD.** It’s financially prudent, flexible, and avoids loss of FD interest. The net cost of property doesn’t increase because interest on FD offsets interest on OD.

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Would you like me to prepare a detailed note or comparison table to explain this further?

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