Things to Know Before Taking a Loan against Fixed Deposit

Do you have the ability to put your money to work for you? Initially, this may seem like a pipe dream. The truth is, there are plenty of productive ways to invest your money.

Most of us are forced to sell assets like fixed deposits during an emergency. This strategy may help you weather a temporary storm, but it defeats the point of your investment. What is the next best option if you do not want to cash your fixed deposit? To get a loan against it!

This blog will discuss what you need to know before applying for a loan against a fixed deposit.

Things to know before taking a loan against a fixed deposit

Loan eligibility

Making sure you qualify for a financial product is a top priority. Anyone with a fixed deposit may take advantage of this lending option. 

The lender will consider your application against their criteria when you request an overdraft. Your occupation, monthly earnings, or credit history will be considered. But, the deposit does not qualify for the lending facility if it is in the name of a juvenile or if the FD was established only to avoid taxes.

Borrowing limits

Loans secured by fixed deposits have credit limits. The amount in your checking account directly affects how much you can borrow. Lenders often only lend 90-95% of the FD amount.

Lien on the fixed deposit

There is interest to pay when you use a fixed deposit as collateral for a loan. The bank will create a lien on the deposit when you use it as collateral for a loan. The bank will have an immediate and irrevocable claim on the funds. This claim will be there until the loan term ends. Because of the lien, the loan interest rate is lower than that of a traditional fixed deposit.

So, the bank may use the FD to reclaim the loaned money if you fail to make the required payments. After complete repayment, the lien will be lifted automatically.

Tenure of the loan

The term of the loan is of utmost importance. There is no set repayment period for a loan against a fixed deposit. Hence, the max loan term is equal to the tenure of your fixed deposit.

Things to know about loans against a fixed deposit

• The income, employment, or credit background do not matter. Anyone with a savings account may apply for a loan against a fixed deposit.
• Any person or couple with a fixed deposit may apply for a loan against FD. You cannot obtain a loan against a fixed deposit on behalf of a minor, nor can a depositor.
• Self-employed people are also eligible for a loan against a fixed deposit. You may apply for this loan regardless of your credit history.
• No fees are associated with taking out a loan against a fixed deposit.
• The interest rate is often lower than other unsecured loans like personal loans. It is possible to repay the loan in a single lump sum or instalments, but only when the FD period has expired. Typically, a loan against a fixed deposit will incur an interest rate of 2% more than the FD interest rate. If the interest rate on your FD is 6%, you might end up paying 8% on your loan. Still, a few banks will provide you with a loan against a fixed deposit. 
• A fixed deposit is used as collateral when someone borrows money from a bank. If you default on a loan against a fixed deposit, the bank will seize the deposits to recover the lent funds.

What are the benefits of a loan against a fixed deposit?

You can get a loan of up to 70% to 90% of the total amount needed.

Based on your bank, you may borrow between 70% and 90% of the value of your fixed deposit. If you have Rs. 10,000 in a fixed deposit, you are entitled to benefits of up to Rs. 9,000. After a loan is approved, any funds still in the fixed deposit account will continue to add interest. Each financial institution has its set limits.

You will incur a relatively low-interest rate.

A loan against a fixed deposit has a lower interest rate. It is usually a few percentages more than the interest on a savings account. If the bank offers a 9.25% interest rate on your savings account, you may have to pay approximately 11.25% for a loan against a fixed deposit. This rate is far lower than what banks charge for a personal loan.

There is a flexible payment procedure.

The loan term secured by a fixed deposit matches the term of the fixed deposit. Loan terms may be less than the term of the fixed deposit, but they cannot be more. For example, if the fixed deposit term is five years, the loan term cannot exceed that.

There are no processing fees.

Unlike other types of loans, you do not have to pay additional charges for application processes. Furthermore, the application process is hassle-free.

This financing option is one of the simplest out there. Very little paperwork is necessary when you have a fixed deposit account. After completing the required paperwork, you can get a loan against a fixed deposit with minimal paperwork.

You do not need to break the fixed deposit.

Many people need urgent access to cash. They must break their FD savings due to this. You may still meet your financial requirements without withdrawing from your FD. Your investments are still secure when you take out a loan against a fixed deposit.

Conclusion

A loan against a fixed deposit might be a good option when you’re short on funds. You should see it as a way to get funds quickly. If you take out a loan against a fixed deposit and fail to make the required repayments, the bank may foreclose on your FD to recoup the money it loaned to you. These factors will make it straightforward for you to apply for a loan against a fixed deposit.

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