Is overdraft facility is better than premature FD closure ?

Overdraft is a facility available for some customers based on their deposits and transactions with the bank. Generally, the interest in OD amount will be 2% more than that of what you are getting on your FD. Again the interest will depend upon the amount you are using and the time period you avail that facility. So you have to pay more on OD.
If you cancel your FD, there will be some charges from the bank for that. These charges will depend on the amount and after how many days you are cancelling your FD. This varies from time to time.
As a general rule, it is better to cancel FD than taking an OD. But it is always advisable to meet the Bank Manager and discuss, as it will depend on many issues and it will vary from case to case.

Overdraft is nothing but a type of personal loan given to you by bank against your FD. This FD will work as a security against the loan and in case you default in the repayment of loan in stipulated time, the FD will be accordingly locked by the bank in their custody for recovery of money from that.

Banks are only interested in earning interest by giving loans to the prospective customers and this is one way to lure the existing bank customers for loans who have their FDs with the bank. Bank have surplus funds in current accounts, savings bank accounts, FDs and other instruments and that they give on loan to earn their income. Few people will be withdrawing money from the bank time to time and a large chunk of money is with the bank only and they can not keep this idle with them and have to give it on loan to earn income on it. Other than the commissions and fees this the major source of revenue generation for the banks.

You have mentioned in your query that interest charged on overdraft is 1%. Actually it is not 1% but is 1% more than the FD interest rate. As your FD is getting 6.5% interest so any loan or overdraft you take against this FD will be charged at 6.5+1=7.5%. This is a very special scheme by SBI otherwise banks charge in the range of 2 to 3% more on overdrafts than that of the existing FD rate.

If you are in a dire need of loan and think that you will soon return it and do not want to take the hassles of closing the FD before time then only one should go for such costlier loans otherwise it does not make sense to take a loan at a higher rate than what you are getting on your FD. Please also remember that if you are not able to repay the loan in time then you will be paying the interest on interest and it will go on compounding further. The mathematics of loan is very intelligently worked out and one must be careful in falling these traps in the name of overdraft.

Opening a deposit account with a bank or any financial institutions is only for future savings. Premature closure or availing loan on that should always be avoided. If the situation is worst in money requirements the opting of pre mature closure may be considered.

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.

While applying for a loan in the Bank where your fixed deposit is already existing, it would be a better choice to avail of the loan. I am putting some points in favour of my statement and these points may pl. be seen.
1) Consider the case of a fixed deposit in the year 2011, when the rate of interest in most of the Banks( including both Nationlised and Private Banks) was more or less 10.5 percent per year and if the time - span for such a deposit was decided for ten years, the returns on maturity would quite attractive and requesting for the premature closing of such fixed deposit would cause a substantial loss with respect to interest payment. Under such conditions, interest would be payable prevailing at the current rates hovering round 7.25 maximum. Hence watch the differential losses.
2) One can apply loan against the FD and the maximum amount of loan to be sanctioned would be around 90 percent of the quantum of fixed deposit and the loan is to returned within five years - the maximum limit of returns in the calculated EMI.
3) However, it would be always advantantagous to avail of the over drafting facility for a lesser tenure. Since you have stated that over- draft facility is available at 1.0 percent interest - rate. Let me substantiate the facts behind it. If the rate of interest of your fixed deposit is 10.5 and on that case loan for the overdraft amount would be 11.5 percent. Here the only concession is the reduction of interest rate month wise because of repayment of EMI and there would be progressive reduction of interest rate.
4) If taken for for a short period say for two to three years for executing any emergency, such over aught facility can be sought for.
5) Only the plus point with the SBI draft - facility is that they are offering the same at 1.0 percent to lure the customers otherwise the same remains within the range of 2-3 percent.