Loan Against FD
We have all faced financial exigencies or a cash crunch when we need to harness our financial resources quickly. We resort to several mechanisms to raise cash, including breaking our fixed deposits to garner liquidity. But breaking fixed deposits results in the imposition of a penalty which reduces the cash resources available to us. The bank pays us interest at a much lower rate than the rate we entered into the FD.
Alternative solutions do not require anything as drastic as breaking a fixed deposit. You can opt for a loan against a fixed deposit.
In a loan against a fixed deposit, you are allowed to borrow against the security of your fixed deposit. The deposit is under lien to the lending institution until the loan exists. There are easy interest terms that include lower borrowing rates of interest compared to the market interest rates for loans. Also, the fixed deposit stays intact for the duration of the loan.
The advantages of a loan against a fixed deposit include the following:
- A secured loan against the collateral of the fixed deposit.
- Interest is charged only on the portion of the loan borrowed.
- The interest rate is much lower than the market interest rate for a similar loan. The interest rate on a loan will be higher than the fixed deposit rate, with a spread varying typically from 2% to 5%.
- The loan interest rate against FD is lower than the market interest rate on loans by 2% - 2.5% p.a. Because of the lower interest rate, the equated monthly instalments on the loans are also lower.
- Loans offered are up to 90% - 95% of the fixed deposit amount. Loans are never offered for the full amount of the deposit. So the fixed deposit constitutes an upper ceiling against the loan as the loan amount can never exceed it.
- The loan so approved against the pledge of the fixed deposit is known as a demand loan.
- There are no processing fees for loans against fixed deposits.
- As you avoid breaking your fixed deposit, no penalties are levied and lower interest playouts are made.
- The paperwork required is also minimal. You don’t have to submit employment certificates, salary certificates, IT returns, etc. Your fixed deposit serves as adequate collateral or security for the loan.
- Your eligibility is not assessed using CIBIL scores or any other credit score. Your fixed deposit alone is enough assurance of repayment of the loan. This offers a good option for people with poor credit scores to borrow.
- There are no prepayment fees or other fees charged on the loan transaction. In fact, the bank or the lending institution benefits as it charges a spread over the FD interest and does not have to pay interest on the loan.
- The excess loan interest (spread) is only charged on the loan amount taken against a fixed deposit.
Qualifications for obtaining a loan against FD
All categories of borrowers can borrow against offering the pledge of their fixed deposits. Minors and those who have invested in 5-year tax-saving deposits cannot avail of this facility.
Both residents fixed deposit holders and NRI deposit holders can avail of loans against fixed deposits.
Hindu undivided families, family trusts, partnerships, societies, and companies can all pledge fixed deposits.
Repayment of the loan against a fixed deposit
The loan can be repaid in either instalments or a fixed lump sum. The only pre-condition is that the loan has to be repaid before the maturity of the fixed deposit.
Fixed Deposit as collateral
As the fixed deposit is the collateral or security of the loan, in the case of maturity, if you are unable to repay the loan proceeds, the bank or the financial institution will recover the loan from the fixed deposit amount.