Fixed deposits (FDs) are commonly considered a reliable savings option with predictable returns. 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 allows you to seek funding with your FD as collateral. The financial institution 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.

Things to Know Before Taking a Loan Against an FD

1. Eligibility Criteria

You must review the institution’s eligibility requirements before applying for a loan. Eligibility criteria can vary depending on the institution and the specific terms of the loan. 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 usually lower than the rate charged on unsecured loans, since the FD secures the loan. The specific interest rate on a loan can vary depending on the institution. Some offers a fixed interest rate for the duration of the loan. Others may offer a variable interest rate that can change over time.

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. 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

The documents and forms required for a loan against your fixed deposit will be minimal since the institution 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 institution 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.

Takeaway

A loan against a fixed deposit can be a convenient way to access funds without closing your deposit prematurely. There are several factors to consider when deciding on a loan against FD, including the loan amount, interest rate and applicable fees.

Before making a decision, it is advisable to evaluate your repayment ability and financial requirements. Make sure to calculate your returns before you make an investment and plan your financial goals accordingly.

Shriram Finance offers interest rates of up to 8.15% p.a. on fixed deposits*, inclusive of an additional 0.50% p.a. for senior citizens and 0.05% p.a. for women depositors (subject to applicable terms and conditions).

Key Takeaways

• A loan taken against an FD is a type of loan in which you use your FD as collateral to borrow money.
• In many cases, financial institutions may allow borrowing up to a certain percentage of the value of the fixed deposit, subject to their policies and applicable terms.
• 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.

FAQs

Is it better to break the FD or take a loan?

Breaking an FD means that you will lose the interest, but taking a loan against your FD means paying interest on the borrowed amount. Make your decision based on how long you need the money and your ability to repay a loan.

Can I take a loan against my Shriram Unnati Fixed Deposit?

Loan facilities against fixed deposits may be available depending on the deposit scheme.

What is the maximum loan you can take against an FD?

The maximum loan amount available against a fixed deposit may vary depending on the policies of the financial institution. In many cases, institutions may allow borrowing up to a specified percentage of the fixed deposit value, subject to applicable terms and conditions.

How do I repay my loan taken against an FD?

You can repay the loan against your FD in equated monthly instalments (EMIs). Ensure that the repayment schedule is within the FD's tenure.