When planning to purchase a car, many individuals explore financing options such as traditional vehicle loans. However, if you already hold a Fixed Deposit (FD), another option may be available — a Loan Against Fixed Deposit (Loan Against FD).
While this is not a dedicated car loan product, some institutions allow borrowers to pledge their FD as collateral and avail a loan, which can then be used for various personal purposes, including purchasing a vehicle. This article explains how a loan against FD works and what to consider before using it for a car purchase.
How to Apply for a Car Loan Against FD?
Applying for a loan against a fixed deposit for car is very simple. The application process requires few documents. However, the eligibility criteria require the applicant to be over 18 years with a valid fixed deposit to apply for a loan against FD for a car.
Here are the steps to apply for a loan against FD for a car:
Step 1: Contact your preferred bank or Non-Banking Financial Company (NBFC) to get a car loan against your fixed deposit.
Step 2: Fill out a loan application form to apply for an overdraft against your FD.
Step 3: Submit your FD receipts to the lender.
Step 4: Your FD will be accepted as a collateral by the lender/issuer, and the loan amount will be transferred directly to your bank account.
Interest Rates on Loan Against FD
The interest rate on a loan against FD is typically linked to the FD interest rate and may be slightly higher than the rate earned on the deposit. The exact rate depends on the institution and prevailing policies. However, borrowers should compare options carefully and review all applicable charges before deciding.
Loan Amount Against Fixed Deposit
Most financial institutions in India are likely to sanction approximately 70-75%* of the fixed deposit amount as a loan. In case you fail to repay the loan, the lender/issuer may take that amount from your FD principal amount along with interest. That’s why it is a good idea to repay your loan so that you don’t miss out on the interest you get on fixed deposit.
Features of a Loan Against FD for Car
Below are the basic features you need to keep in mind while deciding if you want to apply for a loan against a Fixed deposit:
- Loan-to-value ratio (percentage of FD allowed as loan)
- Interest rate applicable on the loan
- Repayment tenure
- Processing charges, if any
- Prepayment or foreclosure conditions
- Impact of default (FD may be adjusted toward outstanding dues)
Benefits of availing of a loan against FD
There are several advantages and benefits of applying for a car loan against a fixed deposit.
- Access to Funds Without Premature Closure: A loan against FD allows you to access liquidity without breaking your deposit. Your FD continues as per its original terms while serving as collateral for the loan.
- Retain Interest on Your FD: Even after availing the loan, the fixed deposit continues to earn interest as per the agreed rate. This helps you retain the benefits of your investment while meeting immediate financial requirements.
- Flexible Usage of Funds: The loan against FD is a multipurpose facility. Once disbursed, the funds may be used for various personal requirements, including vehicle purchase, education expenses, medical needs, or other financial commitments.
- Hassle-free application process - Application for such a this loan is very easy and requires very few documents. Because there is no complicated procedure, the loan gets sanctioned faster. The application process is user-friendly, and many banks offer the facility to apply online without hassle.
Conclusion
A loan against fixed deposit is not a dedicated car loan product, but it may be used to fund a vehicle purchase, subject to eligibility and lender terms. It allows you to access liquidity while keeping the FD intact, though interest costs and repayment obligations must be considered carefully.
Before proceeding, review the applicable interest rates, charges, and loan conditions. Comparing financing options can help ensure that the chosen method aligns with your broader financial plan.