Fixed deposits (FDs) serve as a valuable investment vehicle, offering predictable returns and financial stability. One of the lesser-known advantages of FDs is the possibility of securing a loan against them. This loan facility, often referred to as an overdraft, provides a convenient and accessible source of funds in times of need.
Unlike traditional loans, obtaining a loan against an FD typically involves a streamlined process with minimal documentation. This is because the FD itself acts as collateral, reducing the lender's risk. As a result, borrowers can often secure loans at competitive interest rates, potentially lower than those associated with personal loans.
Let’s take a look at everything you need to know to take a loan against a fixed deposit.
What is a Fixed Deposit?
A fixed deposit is a savings scheme offered by banks or NBFCs. It can help you grow your savings over a period and give you assured returns. To start an FD, you must first invest a lump sum of money, select a tenure for this deposit, and upon maturity, you will get both the principal amount and the interest in your registered bank account. Depending on your financial requirements, you can decide if you want the interest paid in instalments or upon the FD’s maturity.
You can open a Shriram Fixed Deposit with an amount starting from Rs. 5000. With a Shriram Fixed Deposit, you can rest easy knowing that there will be no changes to an existing deposit in the case of market fluctuations. You will be paid the entire principal amount you invested plus the interest amount upon maturity of your deposit. The revised rates will only be applicable if you are starting a new deposit.
What is the Eligibility for getting a Loan against an FD?
While getting a loan against an FD seems easy, you must remember that there are specific criteria you need to meet to get a loan against an FD. Listed below are the conditions you need to fulfil to be eligible for such a loan:
- You need to have a fixed deposit account to be eligible for a loan against FD.
- The fixed deposit amount should be more significant than the loan amount.
- A fixed deposit in the name of a minor does not qualify for this scheme.
- The loan’s payback term cannot be greater than the tenure of the fixed deposit.
Procedure to get a Loan against FD
There is no need to prematurely break FDs as you can always use them to get loans. You can obtain a loan against an FD online or offline. To initiate the process, you must submit an application form, the required documents, and the FD receipt.
Features and Benefits of a Loan against FD
- No credit score checks: Generally, when you apply for a loan, the bank/NBFC will check your credit score. However, in the case of a loan against FD, your eligibility is not dependent of the credit score; hence, it majorly helps individuals with a lower credit score.
- Lower interest rates: An FD acts as a security for the loan, and the interest charged on the loans is less. The interest rates on the loans against an FD are usually lower than on personal loan. Hence, Equated Monthly Instalments (EMIs) on the loan is lower.
- Minimal documentation: If you have an existing relationship with the financial institution, you may not have to complete your KYC process, resulting in minimal documentation procedure.
- No pre-payment penalty: Pre-payment on a loan is the ability of a customer to pay the entire amount loaned before its official due date; however, you might have to pay some charges. In the case of a loan against FD, you won’t have any pre-payment penalty. You can also continue earning interest on your FD while taking a loan against it.
How Does the Loan Against FD Work?
A loan against fixed deposit (FD) is a type of loan where you use your existing fixed deposit as collateral and you can borrow up to 75% of your FD.
Key Features
- Loan Amount: Typically, you can borrow up to 75% of your FD's value.
- Interest Rate: Loan interest rates are generally lower than those for personal loans or credit cards.
- Collateral: Your fixed deposit acts as security, ensuring the lender's investment.
- Repayment: The principal amount can be repaid at the end of the loan tenure loan or through EMIs.
Example:
If you have a fixed deposit of ₹5 lakhs, you could potentially borrow up to ₹3.75 lakhs. Let's say you take a loan of ₹3 lakhs. Instead of paying interest on the entire ₹5 lakhs, you'll only pay interest on the borrowed amount of ₹3 lakhs.
Advantages of a Loan Against FD
- Lower Interest Rates: Enjoy more affordable borrowing costs compared to other loan types.
- Quick Approval: The process is often faster due to the security of your FD.
- Convenient Access: Borrow money without liquidating your investment.
Note: While a loan against FD can be a convenient option, it's essential to consider factors like interest rates, repayment terms, and any associated charges before making a decision.
Steps to Open an FD
Shriram Fixed Deposit is rated “IND AA+/Stable” by India Ratings and Research, indicating high safety. Here are the steps to quickly start a new fixed deposit:
- Step 1: Visit the bank branch or NBFC and ask for the FD opening form.
- Step 2: Fill in all the details and submit documents like identity proof, address proof and bank account details.
- Step 3: After verifying the information in your documents, the bank/NBFC will open your new FD account.
- Step 4: Your account will be started, and you can now earn interest and use it for additional benefits like taking a loan against FD.
Conclusion
A loan against a fixed deposit is easy to get, provided you already have a fixed deposit. You do not need a credit score, and banks/NBFCs won’t need to check it if you have a fixed deposit. If you have not invested in an FD yet, it’s never too late, and you can start one now.
Start a Shriram FD to get one of the best interest rates available. You can use the Shriram FD calculator to check the amount of interest you can avail of upon the maturity of your deposit. Senior citizens can also benefit from interest rates up to 9.40%* p.a., including an additional 0.50%* p.a. for Senior Citizens and 0.10%* p.a. for women depositors. You can easily use the FD to help with whatever financial need pops up in your life.
FAQs
1. What is the tenure within which the loan taken against FD should be repaid?
A loan against an FD must be repaid before the fixed deposit maturity.
2. In which type of deposit loan against FD is not allowed?
You cannot take a loan against FD if the deposit is in the name of a child or if you have a five-year tax-saving deposit.
Key Highlights:
- A personal loan against FD can be taken by anyone who already has a functional fixed deposit.
- You do not need other additional documents to take a loan against an FD.
- The interest rates on a loan against FD is lower than the interest rate on regular loans.
- There is no pre-payment penalty for a loan against FD.
