Everything You Need to Know about Loan Against Fixed Deposit

Fixed deposits are an invaluable financial resource. This is because your investment in an FD matures over a long tenor, and along the way it earns interest, thereby ensuring that your money multiplies. However, it is possible that you encounter various situations and emergencies such as a wedding in the family, emergency hospitalization of your spouse, or financing your child’s higher education needs in the interim. Under these circumstances, you will have to raise finances urgently. This is where investing in a fixed deposit proves to be handy. Instead of taking an unsecured loan to meet your need for finance, you can take a loan against FDs to fund your immediate and urgent requirements.

What is a Loan Against Fixed Deposits

When you have invested in an FD and are looking for short-term funding options, for emergencies or otherwise, a loan against FD is your best option. Apart from giving you substantial returns as an investment to meet your short- and long-term needs, fixed deposits act as the collateral giving your quick access to the funds you need. This financing option helps you avoid losing out on your earnings when you prematurely liquidate your investment. It also provides for any immediate needs for finance while allowing you to keep your investment going. A loan against FD is a secured loan that you can avail at a nominal rate of interest.

Take a look at all you need to know about a loan against FD.

  • Low Interest Rate

The interest rate charged on your loan against FD is normally 2-2.5% above the interest paid on the deposit. However, this varies depending on the financial institution. There may not be any other charges that you may have to incur apart from your interest rate. Compared to options like unsecured personal loan, a loan against FD has lower interest charges, making this financing option more cost effective for you.

  • High Loan Amount

Say you need funds for a medical emergency or to fund your child’s education. Your requirement may be quite large. When it comes to the amount of money that you can borrow, a loan against FD can give you access to a substantial sum provided the value of your FD investment is high. Typically, you can avail a loan of up to 75% of your FD’s value.

  • Loan Tenor and Repayment

You can enjoy a flexible repayment when you choose a loan against FD. Usually, you can repay this loan until the time your FD matures. So, if you have an FD for 5 years, and you decide to take the loan after the first year, you have 4 years to repay your loan. You can take a loan against FD after 90 days from the start of the FD.

When you choose a Loan against FD from companies, you can also avail the loan very quickly and easily. For instance, NBFCs approves the loan quickly so you can get the money in the bank in just 72 hours after you apply. Secondly, you can repay this loan more easily without any foreclosure and part-prepayment charges.

  • Tax Benefits

Depending upon what you use the loan for, you can receive tax benefits. For example, if you are self-employed and using the loan against FD for the purpose of your business, then you can deduct the interest paid as a business expense. Similarly, if you are using the loan to pay for your child’s education, you can save on taxes. Check the appropriate sections of the IT Act to see if your use of the loan against FD entitles you to save tax.

Now that you know how hassle-free and affordable taking a loan against FD is, check your finances and see if you require funds. Check the eligibility criteria and documents required for this loan and take care of all your monetary needs with ease.

What are the advantages of taking a loan against FDs?

  • You can avoid heavy interest payments on your loan. Consider this: when most financial institutions offer personal loans, they charge you a 16–24% rate of interest. However, when you take a loan against FDs then you can benefit from a much lower interest rate.
  • The interest rate on your loan against FDs is usually 1–2% higher than the interest that you are receiving on your deposit.
  • Loan against FDs are easy to apply for and receive. In most cases, you can avail a loan from the same financial institution where you have your fixed deposit. Also, applying is quick, as you don’t have to engage in a long-drawn application processes.
  • You do not have to pay an extra charge if you wish to make part pre-payments on your loan against FD. This allows you to clear your debt obligation quicker.
  • In contrast to a short tenor that usually accompanies personal loans, since you are pledging collateral, your loan against FD comes with a lengthy, flexible loan tenor, making repayment easy.
  • Your FD continues to grow and earn interest even when you take a loan against it and are repaying it.
  • You can avail a loan of up to 90% of the amount you have invested in fixed deposits. So, if you have an FD investment worth Rs.10 lakh, then the financial institution will offer you a loan of up to 90% of Rs.10 lakh, which is a maximum of Rs.9 lakh.

Here, an important thing to remember is that in case you have a joint FD, you will have to furnish documents and consent from both investors in order to avail a loan against FD. Also, some financial institutions allow an overdraft facility on the loan they sanction. So, you can take advantage of this facility if need be.

However, in order to avail such benefits, it is important to know how to choose a lucrative FD in the first place. Choosing a company fixed deposit in this case allows you to benefit from higher interest rates and at the same time offers you funds against your deposit quickly, if need be. Choose a Fixed Deposit from a trusted issuer like NBFCs to maximise your returns.  With ICRA’s MAAA (Stable) and CRISIL’s FAAA/Stable rating, their Fixed Deposits offer high interest rate returns of up to 8.4% on your investment. Moreover, you can check your maturity amount in advance by using the FD calculator to decide whether you want to invest in a cumulative FD to avail interest on maturity, or a non-cumulative FD to access interest payouts at regular intervals.

It is indeed a good idea to start a fixed deposit investment early in your career or whenever you have money to spare. It will help you build a substantial corpus over time that will act as a security blanket in case of an emergency.

Get a Personal Loan Against Fixed Deposit

When a personal loan seems inaccessible or expensive in light of an emergency, you may consider liquidating your investments. However, there is an easier way to raise finance without breaking or ending your investment. For instance, not only you can earn regular, risk-free returns by investing in a fixed deposit, but you can also take a loan against it.

In situations where you need finance instantly, a personal loan against fixed deposit can come to your rescue. Here, the FD acts as collateral and offers finance immediately to help you tackle the situation at hand. A loan against fixed deposit is better than regular loans in this situation, as it is easy to avail, has a low interest rate and is more flexible too.

You can avail a personal loan when you need funds on a short notice to finance an array of needs such as setting up a warehouse for your business, planning a family wedding, or admitting your child to a foreign university. A personal loan will help you raise the desired amount, but it comes with a heavy rate of interest too. A more convenient and affordable alternative is taking a loan against fixed deposit. You can borrow this loan to fund all your financial needs without breaking your FD.

Take a look at some of the features of a loan against FD to get a better understanding of why you should consider this option.

Amount of the Loan

While a personal loan amount depends on a number of factors, including your credit score and the number of loans you currently have, the factor that determines the amount of a loan against FD is the fixed deposit itself. Most financial institutions usually offer up to 75% of the fixed deposit value in the form of a loan. The maximum loan amount differs for loan against FD and a personal loan. Each financial institution has a different amount that it offers via a personal loan. Your loan limit will depend on your credit history and repayment capacity. However, in case of loan against FD, you can avail a higher loan amount, of up to 75% of the value of your fixed deposit.

Loan Tenor

The loan tenor cannot be more than the tenor of your fixed deposit. However, you can take loan for lesser period than your FD’s tenor. So, if your fixed deposit’s tenor is 15 years, you can take a loan for up to 15 years. In case you choose to take a loan in the 10th year, you will have 5 years to repay it. The tenor for loan against FD should be less than the maturity time of the fixed deposit. For instance, if your fixed deposit is for 15 years, then your loan against FD cannot be for more than 15 years. On the other hand, in the case of personal loan, each lender has a different time frame. On average, you can request up to 5 years’ time to repay a personal loan. So, in this regard too, fixed deposits emerge as the better option.

Interest Rate

The rate at which you take loan against FD is much lower than that of traditional personal loans, making it a far more viable option. Typically, when you take a loan against FD, you have to pay around 2% more as interest than what you were receiving on the fixed deposit. A loan against FD comes with a comparatively lower interest rate than that of a personal loan. If you are availing a loan against FD, you will have to pay an interest rate that is 2%–2.5% higher than what you are receiving on your fixed deposit. Since a personal loan is an unsecured loan, it is not backed by an asset. Thus the lender charges more interest. However a loan against FDis a secured loan, and so the issuer can give you the money at a more nominal interest.

Repayment Terms

Financial institutions offer flexible repayment options and you have the choice to repay this loan in the form of EMIs, or, if you have a lump sum amount, you can choose to repay the loan in one go as well. On the other hand, when you take personal loan, for instance, you have to adhere to the EMI system of repayment and you also have to pay an extra charge to make part pre-payments during the tenor.

Choose a Fixed Deposit from NBFCs to benefit not only from a high interest rate ,but also features such as a loan against FD. This is available to you at a nominal interest rate with minimal application requirements, and a short processing and disbursal time frame. Besides, with CRISIL’s rating FAAA and ICRA’s MAAA/Stable rating, you know that your money is in good hands.

Processing fees

No matter which financial institution you take a loan from, you will have to pay a processing fee to cover the expenses of disbursal of the personal loan. Generally, financial institutions charge 0.5% to 2% of the loan amount as processing fees. However, in case you are availing a loan against FD, you don’t have to pay any fee for processing. This is because the financial institution already has a copy of your documents and personal information, and has checked your financial stability too.

Minimal Documentation

As the financial institution already has your details on file, you don’t have to go through an extensive application process to get a loan against FD. The procedure to avail the loan is quick, easy and hassle-free as compared to any other loan variant.

So, it makes sense to add FDs to your investment portfolio. Not only do they balance high-risk investments and offer assured returns, they also offer assistance when you need funds at a moment’s notice in the form of a loan against FD.

FDs help you earn guaranteed returns on your investment and offer better returns as compared to a savings account or a recurring deposit. In addition, adding this investment to your portfolio is sure to come in handy when you need funds immediately, as a loan against FD overcomes the pitfalls associated with a personal loan.

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Author: Eddy

Eddy is the editorial columnist in Business Fundas, and oversees partner relationships. He posts articles of partners on various topics related to strategy, marketing, supply chain, technology management, social media, e-business, finance, economics and operations management. The articles posted are copyrighted under a Creative Commons unported license 4.0. To contact him, please direct your emails to editor.webposts@gmail.com.