Fixed deposits (FDs) are a safe and low-risk investment option. They are a great way to invest idle funds that can provide you with multiple financial benefits. When you face a cash crunch, the first move is often to liquidate your assets, especially FDs. But you can avoid closing your FD prematurely and still protect your investment by taking a loan against a fixed deposit from the same bank or financial institution.
If you have a fixed deposit with a financial institution, you can get access to funds by taking a loan against your FD. Here are a few important things you need to know before taking a loan against your FD.
What Is a Loan Against Fixed Deposit?
A loan against a fixed deposit is a type of secured loan that allows you to seek funding with your FD as collateral. The lender will allow you to borrow a certain percentage of the fixed deposit's value. The loan's interest rate is nominal and comparatively lower than other loans in the market. One of the benefits of a loan against a fixed deposit is the ability to continue earning returns on the investment while also borrowing against it. This means that the money in the fixed deposit account continues to earn interest, even while a portion of your funds has been borrowed as a loan.
Things to Know Before Taking a Loan Against an FD
1. Eligibility Criteria
You must review the lender's eligibility requirements before applying for a loan. Eligibility criteria can vary depending on the lender and the specific terms of the loan. For most financial institutions, you are eligible for a loan if you are a fixed deposit holder, including a joint account. This excludes minors and 5-year tax-saving fixed deposit holders. Loans against FDs are available for Indian citizens, NRIs holding fixed deposits, family trusts, sole proprietors, partners, companies, clubs, associations and societies. The financial institution will also check your profession, monthly salary and credit profile before sanctioning the loan.
2. Interest Rate
The interest rate on a loan against a fixed deposit is lower than the rate of other types of loans by 2% to 2.5% p.a. This is because the FD secures the loan, reducing the lender's risk. The specific interest rate on a loan can vary depending on the lender. Some lenders offer a fixed interest rate for the duration of the loan. Others may offer a variable interest rate that can change over time. Generally, the interest rate for your loan against an FD is 2% to 3% higher than the deposit's interest rate. For example, if your bank offers a 7.5% interest rate p.a. for a fixed deposit, the interest rate levied for the loan against that fixed deposit will be around 9.5 to 10.5% p.a., which is lower than other types of loans in the market.
3. Impact on the Fixed Deposit
Taking out a loan against a fixed deposit can impact your funds in the fixed deposit account and the overall return on your investment. Carefully consider the potential impact to determine whether the loan is a financially viable option for your needs. Your fixed deposit money will be reduced by the amount borrowed as a loan. This means that the balance in the deposit will be lower and the overall return on the investment may be reduced. The interest earned on a fixed deposit is typically based on the balance in the account. If the balance is reduced by the amount you borrowed as a loan, the interest earned on the FD may also be reduced.
Loans taken against fixed deposits have costs like other loan facilities. Your bank or financial institution will create a lien on the deposit if you use it as collateral for a loan. Due to the lien, the loan is secured and has a lower interest rate. Your bank or financial institution will automatically receive a claim on the funds placed until the loan term is over. If you default on loan payments, the lender can seize the money in the fixed deposit account as collateral. However, as soon as you have paid the amount in full, the fixed deposit will be instantly released.
4. Additional Charges
If you consider taking a personal loan, make sure you factor in these possible additional fees:
- Processing charges
- Verification charges
- Penalty on late payment of EMIs
- Penalty for prepayment or foreclosure of the loan
- Fees for duplicate statements and other charges
But in the case of loans pledged with a fixed deposit as collateral, there are no hidden or additional charges. The documents and forms required for a loan against your fixed deposit will be minimal since the lender already has your KYC details updated from the opening of your FD.
5. Loan Period
The tenure for a loan against a fixed deposit is the length of time that you have to repay the loan. The loan repayment can vary depending on the lender and the specific terms of the loan and may range from monthly instalments to a fixed lump sum. However, it is necessary to consider the loan tenure when evaluating a loan against a fixed deposit. It does not come with a separate loan period. The term of the loan against the fixed deposit is the same as that of the fixed deposit itself. The loan's time may be less than the fixed deposit's tenure, but it cannot be longer than its maturity. Therefore, plan the repayments according to the FD tenure.
6. Credit Limit
The value of the fixed deposit determines the credit limit of your loan. The borrowing limits for a loan against a fixed deposit can vary depending on the financial institution. Generally, some banks may allow you to borrow up to 90 to 95% of the value of the fixed deposit, while others may offer a lower cap. For example, if you have an FD of ₹6 lakhs and the cap is 85%, you can borrow up to ₹5.1 lakhs. If you consider taking ₹4 lakhs, the interest is applied only to the amount loaned.
Ways to Borrow Money Against Your Fixed Deposit
- Loan: To borrow the maximum amount from your fixed deposit, consider taking out a loan against a fixed deposit. This option allows you to borrow up to 95% of the FD value, with interest charged on the entire loan amount as with any other instalment loan.
- Overdraft: With an overdraft facility against a fixed deposit, you can borrow a specific amount based on the value of your fixed deposit and use the funds as needed. Interest is charged only on the amount you borrow and for the time you borrow it. There is no fixed repayment period for an overdraft facility, allowing you to repay the loan any time before the maturity date of the fixed deposit.
- Credit Card: A secured credit card against a fixed deposit is a type of credit card backed by the funds in your FD account. You may get a credit card limit of up to 75% of the value of your fixed deposit. Be careful with this type of credit card, as the interest and fees can be high and not paying the bills on time can harm your credit score.
Takeaway
A loan against a fixed deposit is a convenient option if you need access to funds but do not want to close your fixed deposit account prematurely and potentially miss out on returns. There are several factors to consider when deciding on a loan against FD, including the loan amount, interest rate and fees. If taking a loan against a fixed deposit is a good option for you. Book an FD now and secure your financial needs. Make sure to calculate your returns before you make an investment and plan your financial goals accordingly. Shriram Finance offers one of the highest interest rates, ranging up to 9.40%* p.a. inclusive of a special interest benefit of 0.50%* p.a. for senior citizens and 0.10%* p.a. for women depositors.
Key Takeaways
- A loan taken against an FD is a type of loan in which you use your FD as collateral to borrow money.
- You can generally borrow up to 90-95% of the value of your FD.
- The lender will issue the loan at a rate of interest slightly higher than the interest earned on the FD.
- The interest is levied only on the amount borrowed.
- The repayment period for a loan against an FD can be shorter than the maturity period of the FD, but not longer.
