Is it possible to take loan against Fixed Deposit?

Fixed Deposits (FDs) are one of the most popular and secure investment options for individuals looking for stable returns. However, many people are unaware that an FD can also serve as collateral for availing a loan. This article explores whether it is possible to take a loan against a Fixed Deposit, how it works, its benefits, eligibility criteria, and things to consider before opting for this financial option.

Understanding Loan Against Fixed Deposit

A Loan Against Fixed Deposit (LAFD) is a secured loan provided by banks and financial institutions wherein the FD serves as collateral. Instead of breaking the FD in times of financial need, one can leverage it to obtain a loan while continuing to earn interest on the deposit.

This facility is particularly useful for individuals who need immediate funds but do not want to withdraw their FD before maturity. The process is simple, and the loan amount is usually a percentage of the FD value.

Features of Loan Against Fixed Deposit

A loan against an FD has several features that make it an attractive option. The loan amount offered by banks is typically between 70-90% of the FD value. The interest rate on the loan is usually 1-2% higher than the FD interest rate, making it more affordable than unsecured loans. The repayment tenure is linked to the FD tenure, meaning the loan must be repaid before or by the time the FD matures.

Most banks do not charge a processing fee for LAFD, making it a cost-effective borrowing option. Since the FD is already with the bank, the documentation process is minimal, and there is no need for an extensive credit check. Additionally, the FD continues to earn interest even while being used as collateral

How to Apply for a Loan Against FD

The process of obtaining a loan against an FD is straightforward. The first step is to approach the bank where the FD is held. Many banks also offer online applications for this facility. Next, an application form needs to be submitted, along with necessary documents if required.

The bank will then mark a lien on the FD, which means the depositor cannot withdraw it prematurely until the loan is repaid. Once the application is approved, the loan amount is credited to the borrower’s account. Repayment can be done in equated monthly installments (EMIs) or a lump sum before the FD matures.

Benefits of Taking a Loan Against Fixed Deposit

One of the primary advantages of taking a loan against an FD is the lower interest rate. Since the loan is secured, banks charge a lower interest rate compared to unsecured loans such as personal loans or credit card debt.

The processing time for this loan is quick and hassle-free. With minimal documentation and no need for credit checks, borrowers can access funds almost immediately. Another significant advantage is that taking a loan against an FD does not impact one’s credit score as severely as defaulting on an unsecured loan.

Additionally, the FD continues to earn interest throughout the tenure of the loan. This means depositors do not lose out on investment returns while fulfilling their urgent financial needs. Another benefit is that there is no requirement for a guarantor, unlike other secured loans.

Eligibility Criteria for Loan Against FD

To be eligible for a loan against an FD, the fixed deposit must be held with the bank from which the loan is being requested. Deposits in the name of minors are generally not eligible. The loan amount is limited to a specific percentage of the FD value, as determined by the bank’s policies. Borrowers must also comply with the bank’s repayment terms and conditions.

Things to Consider Before Taking a Loan Against FD

Before opting for this loan, individuals should consider certain factors. The loan amount is restricted to a percentage of the FD, so those requiring higher funds may need to explore other borrowing options. Once an FD is pledged as collateral, it cannot be withdrawn prematurely unless the loan is fully repaid.

Borrowers should also evaluate the cost of borrowing. While the interest rate on LAFD is lower than personal loans, it is still higher than the interest earned on the FD. Therefore, it is crucial to assess whether the loan is a cost-effective choice. Repayment discipline is also essential, as failure to repay the loan could lead to the bank liquidating the FD to recover the outstanding amount.

Comparison Between Loan Against FD and Personal Loan

A loan against FD differs from a personal loan in several ways. The most significant difference is that LAFD requires collateral, whereas a personal loan does not. Due to the security of the FD, banks offer lower interest rates on LAFD compared to personal loans, which often have high interest rates.

The loan amount in the case of LAFD depends on the FD value, whereas a personal loan amount is determined based on the borrower’s creditworthiness. The processing time for LAFD is quicker, as there are no extensive credit checks. Additionally, since an FD secures the loan, its impact on the borrower’s credit score is minimal compared to personal loans, where defaults can severely affect credit history.

Frequently Asked Questions (FAQs)

1. Can I get a loan against a Fixed Deposit held in another bank?

No, you can only avail of an LAFD from the bank where you hold the FD.

2. What happens if I default on the loan repayment?

In case of default, the bank has the right to liquidate the FD to recover the outstanding loan amount.

3. Can I prepay the loan before the FD matures?

Yes, most banks allow prepayment of the loan without any penalty.

4. Does taking a loan against FD affect my interest earnings?

No, you continue to earn interest on the FD while repaying the loan.

5. Is this facility available for all types of FDs?

Most banks offer this facility for standard FDs, but special schemes like tax-saving FDs may not be eligible.

Taking a loan against a Fixed Deposit is a smart financial move for individuals who need urgent funds without breaking their FD. With lower interest rates, quick disbursal, and minimal paperwork, it is a viable alternative to personal loans. However, borrowers should carefully assess their repayment capacity and the terms set by the bank before proceeding. By leveraging their FD smartly, individuals can manage their financial needs effectively without compromising their investments