More often than not, many people face cash crunch wherein one has to take a loan to deal with one’s financial crisis. Even though there are various options from where you can get a loan, one of the easiest ways to take a loan is a loan against your fixed deposit.
Fixed Deposits (FDs) are still preferred by many people in India and are considered as one of the most popular financial instruments because of their safe and secure nature. The option of taking a loan against your FD just adds to the popularity of the investment. During an emergency, instead of breaking your investment, you can simply opt for a loan. This is an alternative given to the investor by banks, instead of breaking the deposit prematurely.
Industry experts suggest one can opt for a loan against FD when one is looking for a better loan rate when compared to personal loans. Usually, the interest rate on personal loans ranges from 14 per cent to 30 per cent per annum. Even after taking a loan against your FD, you still continue to earn interest on the deposit.
However, note that a loan against FD is different from the overdraft facility given by banks. Overdrafts are when the bank allows the customer to withdraw some excess amount of money from their account, up to a certain limit. Also, depending on the customer’s profile and credit score, among other things, the overdraft credit limit also changes from time to time. In the case of overdrafts, the interest paid is usually higher than the interest paid on loans.
What are the benefits of getting a loan against FD?
- No need to break Fixed Deposit
- Lower interest rates
- Can be availed on any kind of Fixed Deposit (domestic and NRI FDs)
- Minimal documentation
- No processing fees
Before opting for a loan, find out how loan against FD works and what are the things to keep in mind while opting for one:
- Amount of loan – The amount of loan granted against fixed deposit by banks is a percentage of the FD amount. It ranges between 70 per cent to 95 per cent of the total fixed deposit value. SBI, for instance, has set a limit at 90 per cent of the FD value. So, if you have Rs 10 lakh as Fixed Deposit with the bank, you will be eligible for a loan amount of Rs 9 lakh.
- Interest rate – The interest rate charged by banks for a loan of Fixed Deposits is usually between 2 and 2.5 per cent more than the interest paid by the bank on the deposit. The interest rate, however, differs from bank to bank.
- Processing fees – Banks generally do not charge any kind of processing fees on loan against FD, unlike home and personal loans. However, this varies from bank to bank.
- Tenure – The loan against FD doesn’t come with a separate tenure. The term of the fixed deposit itself is the maximum loan tenure offered. Similar to home loans, the payment procedure is simple. The borrower pays the EMIs on a regular basis or as decided by the lender.
- Repayment of the loan – For repayment of a loan against fixed deposit, banks generally offer flexible repayment plans. However, it comes with only one condition that the loan tenure should not exceed the duration of the Fixed Deposit held with the bank. The repayment of the loan can be either lump sum or in installments.
- Foreclosure Charges – Banks do not usually levy any penalty or additional charges in case of foreclosure on the loan against Fixed Deposit.