A fixed deposit is one of the most appropriate option to arrange for required funds at a lower cost. In case of a sudden financial emergency or some other predicament, people generally tend to search for loan options from multiple sources. A loan against fixed deposits is a secured type of loan where one can pledge their deposit as collateral and get the needed amount in return.
One can borrow a loan against Fixed Deposits in two different ways – Apply for a loan against fd or ask the bank to issue an overdraft. One can gather a loan amount of up to 90% of the deposit amount. The loan can be taken by any individual with a fixed deposit account, without income, occupation or credit score hindrances. Although, investors paying tax cannot apply for this type of loan.
Given below are certain things to know before taking a loan against FD.
Loan against fixed deposits are independent of any occupational restrictions and can be availed by the salaried and the self-employed. The loan is available against both domestic as well as NRI account holders. There is also no need to maintain a certain credit score to acquire this loan. One can receive the requested amount into their bank account within a few hours after applying. Minimum to zero processing fees is deducted. It is not required to break fixed deposits and go for premature withdrawal. This saves the borrower from incurring any loss.
In the matter of an overdraft, the financial institution will allow a limit based on the amount of fixed deposit. For example, if a person have Rs.20 lakh as an FD amount, a given bank may approve a loan amount of up to Rs.19 lakh. There is no fixed time for repayment of an overdraft. The individual simply needs to pay the interest rate on that fixed deposit as long as they hold the money. Overdraft limit backed by fixed deposit is lower than the deposit amount and the interest charged is higher than the applicable fd charge rate. However, the interest is charged on only the amount borrowed as overdraft and not on the entire limit.
The loan taken against a fixed deposit, on the other hand, is like most other loans. The individual gets money almost instantly and can repay the loan via equated monthly instalment. All the fixed deposit holders include individual holders or those with joint accounts who can apply for a loan.
Opting for this type of loan arrangement is better when the funds required are lesser than the amount deposited in the fd account. Assuming that one has an FD of Rs.10 lakh, if there is a need for only Rs.3-4 lakh, taking a loan would be a better option. Mostly, a loan will prove more cost-effective than clearing off a penalty amount on premature withdrawal.
Typically, most banks charge about 2% higher than the given rate when they lend a loan against fixed deposits. For example, if a depositor had invested in a fixed deposit at 7%, the interest rate on that loan would be 9%. Bank of Baroda charges 1 per cent more and Citibank is known to charge 2 per cent more. HDFC Bank has a minimum loan limit of Rs.25000 with 2% extra interest charged. Banks usually have a loan limit ranging from 85% to 90% of FD.
Loan against FD is available at a much lower rate as compared to personal loans, which is one of the many benefits, as mentioned above. The application process is also hassle-free and banks are working towards making it more user-friendly with minimal documentation requirements. One’s fixed deposit account is also a security, so that any default will allow the banks to recover money from the fixed deposit on that account.
Interest is acquired from the bank on a fixed deposit during the loan tenure too. However, it is always suggested to break the fixed deposit if there is a lack of clarity on whether repayment is possible on time. Default on a loan can impact your credit score, so proceed with care. The biggest benefit of a loan against a fixed deposit is that the financier does not check the credit score or CIBIL record, but the bank also has the right to alter, withdraw or close the fixed deposit to recover the money loaned to the defaulter. The time period of the loan also cannot go beyond the remaining tenure of the FD amount. Taking a personal loan might be a low-cost option if one does not have a fixed deposit and needs funds for any emergency.
Therefore to sum it up, it is quite a flexible option to take a loan against fixed deposits. It is always recommended to run thorough research and inquire about the effects that a loan can have over the prevailing interest rate on fd.