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“Loan against FD” – Heard of it? Obviously, you have. It has been quite a good loan option in recent times. The working generation now is a little far from saving. Lifestyle changes have brought us closer to living in the moment, hasn’t it? So while FDs are a way of saving that most people are not willing to take up, as it secures a lump sum in one place for years. But, the fact is, these FDs have a huge perk. What is that perk? Well, it is a loan against your FD. So, is it like collateral, or is anyone eligible? Let us find out more.
What is a Fixed Deposit?
A fixed deposit is a financial instrument offered by banks or non-bank financial companies that pay investors a higher rate of interest than a typical savings account until the maturity date. It may or may not need the establishment of a second account.
Now that you know what a fixed deposit is – let us get a little deeper into the topic.
What is a Loan Against a Fixed Deposit?
When you invest in a bank fixed deposit, you can easily obtain a loan against it without breaking it. It is comparable to a personal loan. The loan, on the other hand, is structured as an overdraft against your fixed savings. If you invest in a company deposit, you can borrow after three months. In the case of bank deposits, they generally differ from one bank to the next.
Certain banks, such as Punjab National Bank, offer loans as soon as the deposit is made. Some, like HDFC, may even provide one after six months. You should check with your bank about this.
There is no time limit; you can take out the loan till the deposit matures. If the loan is not paid in full by the maturity date, the loan is adjusted against the fixed deposit proceeds. There are no prepayment penalties, so the loan cannot be foreclosed.
There are no restrictions on how cash can be spent. It can be used to meet financial needs, for business, for direct investment in India, or to purchase real estate. Banks provide an overdraft facility in exchange for your fixed deposits. An overdraft can also be obtained against any of your non-resident external (NRE), non-resident ordinary (NRO), or foreign currency non-resident (FCNR) account deposits.
How Much Can You Borrow Through This Option?
You can borrow against the total deposit amount or on a case-by-case basis. Banks lend between 75% and 90% of the deposit after deducting a 10% to 25% margin. The latter may differ depending on the bank and the customer. For example, if you have a fixed deposit of Rs 1 lakh, you can borrow up to 90% of the deposit amount with a 10% margin.
What Could be the Interest Rates?
Interest will be levied on the amount drawn rather than the stated limit. It is approximately 2-2.5% more than the fixed deposit rate. Assume you have a Rs 1 lakh deposit earning 10.5% interest per year. Your overdraft limit is Rs 75,000 at a margin of 25%. If you require Rs 30,000, you can withdraw it from your overdraft account at a rate of 12-12.5% (2-2.5% over deposit rate). Interest would be imposed on Rs 30,000 rather than Rs 75,000.
What are the Benefits of a Loan Against an FD?
- A Loan Against Fixed Deposit, unlike Personal Loan, can be arranged for oneself, a third-party individual, or a business organization.
- The term of a Loan Against Fixed Deposit can be extended if it does not exceed the term of the Fixed Deposit.
- Because you are providing collateral in lieu of the loan amount, you can easily receive a Loan Against Fixed Deposit even if your credit score is lower.
- When you obtain a loan from a commercial bank, you have the option of accessing the funds via checkbook, internet banking, online transfer, or cash withdrawal.
- Because a Loan Against Fixed Deposit is a secured loan, it can be obtained at a reduced interest rate.
- This form of loan is typically provided by the same lender that provides your Fixed Deposit Account. There is little documentation required for a Loan Against Fixed Deposit because the lender has already confirmed your identity and has all of the necessary information.
- You do not need to provide proof of income or job to obtain a Loan Against Fixed Deposit because the bank has your account to fall back on in the event of a default.
- It aids in liquidity management by guaranteeing that you receive the funds you demand without exceeding the term of your Fixed Deposit.
You might be thinking that you could just take up a normal loan instead. Well, yes, you can take up a normal personal loan instead of going through the process of taking up a loan against your FD. Every way is going to have its pros and cons, and let us weigh the two, and you will know what is best for you.
Comparison Between a Loan Against FD and a Personal Loan
In a Personal Loan
– You can get up to 35 lakhs.
– The tenure will generally vary up to 5 years.
– You would need your identity proof, address proof, and your proof of salary.
– The interest would be between 14% to 30% per annum.
– The processing and foreclosure costs would be around 2% of the loan.
In a Loan Against FD
– You can get up to 90% of your fixed deposit amount.
– The loan tenure will extend until the maturity of your FD.
– You do not need to submit any sort of proof.
– The interest rates would be from 2% to 5% higher than the return on your FD.
– There would be no processing and foreclosure fee.
The type of loan you want to take up would differ, as everyone has different financial needs. Someone who wants a big loan would not be willing to settle for 90% of the FD amount, and someone who is just looking for some emergency money would be good to go with a loan against the FD.