Loan Against a Fixed Deposit: Leverage your Investment

A financial emergency or a cash crunch situation can make you look for funding options like loans or other alternatives. Availing a loan against a fixed deposit (FD) rather than a personal loan is better because the loan amount of up to 90% of your FD amount can be availed, whereas, you can only avail up to Rs. 35 lakh from a personal loan. Apart from this, the loan tenure of a fixed deposit is till the FD matures, rather than a personal loan, which is only up to 5 yrs.

Besides, you can get a loan against a fixed deposit with the bank when there’s a requirement during an emergency or an unforeseen circumstance. Instead of breaking your FD prematurely, get a loan against a fixed deposit. Without further ado, let’s dive into the details of the process, loan limit, advantages and disadvantages of availing this loan.

What is a loan against a fixed deposit?

A loan against a fixed deposit works the same way as any other loan, where the borrower receives funds in a lump sum and repays in equal monthly instalments (EMI). It is a type of secured loan in which borrowers can avail funds by pledging their fixed deposit as collateral. This is where the Loan-to-Value (LTV) comes into play. LTV is important it allows you to calculate how much money you will need in savings or from your own pocket. And the loan amount depends on the FD amount. This can be anywhere between 90% and 95% of the deposit amount.

When banks provide a loan, they generally charge roughly about 2% points more than the FD rate. The interest rate on a loan against a fixed deposit would be 9% if the interest on your fixed deposit is 7%.

Eligibility criteria to apply for this loan

The following is the criteria to be met in order to apply for a loan against FD:

• Can be availed by all fixed deposit holders, whether they are individual holders or have joint accounts.
• Resident citizens of India.
• Family trusts.
• Clubs, associations, and societies.
• Sole proprietorships, partnership firms, and group companies.
• Hindu Undivided Family (HUF).

Loan limit in banks

The below-mentioned table has the details of the loan limit in some of the major banks along with the interest rate:

Advantages of a loan against fixed deposit

• A loan secured against fixed deposits carries a lower interest rate than other loan forms like personal loans.
• For a loan secured by an FD, most banks do not impose any processing fee. If the banks do impose a cost, it will be less than the processing fee for other types of loans.
• Loans against fixed deposits are simple to process and require minimal documentation. The application form is processed quickly, and there is minimal paperwork.
• It is not necessary for you to break your fixed deposit to cater to your emergency situation.
• The lender does not check your credit history. Your FD account serves as a security, which means that if you default, the bank will take money from your fixed deposit.

Continue to read the disadvantages and overdraft facility on fixed deposits.