I am one who has taken and still using overdraft instead of premature closure of Fixed Deposit in a bank.
But I may not suggest it as a universal formula. It depends on certain factors like the need of the person, the residual period of the deposit, the required period and ability to service interest and repayment of the money taken.
Loan and overdraft
Banks have two main categories of lending. Though there are various other types of lending, generally for most of the clients these two are the main types.
A loan is lending that a fixed amount is given to the borrower, with certain terms of repayment like EMI. The loan is aimed to be fully liquidated by or before the fixed period.
Overdraft: In an overdraft (or OD ) a maximum limit is fixed for the borrower which he can use as and when wishes but within the sanctioned period. There is no fixed repayment amount or EMI. But the borrower has to service the interest then and there and he should not exceed the limit sanctioned. The borrower can credit money to this overdraft account and withdraw money using cheques subject to the maximum limit allowed.g Overdraft account is also called Cash Credit(CC) account. While overdraft is an operative account, Loan is a fixed account. You can only credit to it, but cannot make withdrawals, once the full loan is availed.
Overdrafts also need security. One's own fixed deposit can also be a security. This facility is called OD against FD or cash credit against a deposit. The question above is regarding the OD/CC against Fixed Deposit.
Suppose you are a person who has a steady income, but it is irregular or periodic. However, you need money regularly to pay for your needs and buys. For a businessman, it happens as he needs to pay his labourers, inputs, etc, but will get his income only after some time. So he needs a source where he gets to take money when needed and put in money when it comes. So if you have a fixed deposit, then you can pledge the deposit and get an OD /CC limit of say 85-90 percent of the deposit amount balance. The interest will be just one percent more than what interest the deposit gets. This means that you have your money and use it too. You can reduce the interest burden by remitting whatever money you get, into the OD/CC account and take it when needed only. When you have the money you can keep the OD account in credit also and draw when actually needed.
In another context, suppose you need some lump sum for urgent purposes, but you are sure that money will come to you in a month or two or just a few days after. You also have a deposit for more than that. It will mature only after some months time, say a year or two or more. In this case, instead of closing the deposit account prematurely and losing interest, you can take an overdraft or even a loan against the fixed deposit.
Those who do not have a source of sufficient income should not take a loan or overdraft. The interest servicing will be a burden and may lead to difficulties and loss.