One of the essential features of fixed deposits is that it offers loan that too at a much lesser interest rate than a traditional loan. An individual can avail loan against fixed deposit without having to meet the eligibility criteria such as a good credit score and thresholds on income. Banks issue this facility by using the investor’s term deposit as collateral. Many top banks offer loan against FD to domestic as well as NRI investors. The various benefits provided through this loan makes it an ideal option for those looking for a short-term loan to fund emergencies.
Here is Some of the Basic Information Regarding Loan Against Fixed Deposit:
Eligibility: All customers as well as single and joint account holders.
Amount of Loan: 70% to 90% of the deposit amount.
Processing Fee: Nil
Repayment Period: Must not exceed the tenure of the fixed deposit.
Interest Rate: Around 1% to 3% higher than the FD rate
Type of Loan: Demand or overdraft
Channels to Apply: Branches and internet banking
The Benefit of Loan Against FD
Given below are the major advantages that loan against FD provides:
Lower Interest Rate: Interest rates of loans against FDs are much lesser than the regular loans making the cost much cheaper and thus, economical too.
No Processing Rate: Most banks do not have any processing charges for availing this loan. This helps individuals reduce the overall cost of the loan.
Hassle-Free Application Process: Unlike the regular loan, loan against FD requires very less documentation. Banks already have the customer’s documents, and thus the applications get sanctioned faster. The application process is easy and user-friendly where usually FD receipts and loan application form is all customers need as documents. Moreover, many banks allow customers to apply for it online which further reduces the hassle.
No Need to Break the FD: Customers do not have to break the FD while applying for this loan. This is extremely beneficial as customers can get the loan sanctioned while earning the interest on FD simultaneously.
No Foreclosure Charges: Most banks do not avail for any foreclosure charges if customers close the loan prior to the said tenure.
Flexible Repayment Option: Most of the Indian banks offer flexible repayment options and individuals can pay regular EMIs.
Interest Rate on Loan Against FD
Banks consider loan against fixed deposit as a demand loan or an overdraft. Therefore, the interest charged is lesser compared to the traditional loan. Depending on the bank, conventional loans are usually charged at around 9% to 15% (or even more). But, in the case of loan against FD, the interest rate is charged at just 1% to 3% higher than the FD interest rate. For example, if customers are earning an interest rate of 6% on the time deposit, the loan will be granted at the rate of around 8%.
How to Apply for a Loan Against your FD Online
A mentioned above, many banks allow individuals to apply for a loan against FD online.
- Log on to the bank portal.
- Input username and password to login to internet banking.
- Go to the fixed deposit option and click on ‘Overdraft against FD’ option.
- Fill in the application and submit it. The application requires relevant details such as the loan amount and tenure.
- The loan will be approved online. The bank sends an email and SMS once the loan is approved.
Since, the entire process is online, customers can apply for the loan from anywhere without any leave from work or taking time off from their busy schedule. This process is easy and straightforward.
Is Loan Against Fixed Deposit A Wise Choice?
Customers have two options when in need of funding. Both the alternatives have its own pros and cons. Given below are the detailed descriptions of each option.
Take a Loan Against Fixed Deposit:
The first option is to avail loan against fixed deposit. Here are some figures to explain the concept. Customers earn 8% on the FD and pay 10% on loan. While, the difference is just 2%, customers need to take into account post-tax FD interest.
Let us consider a case of a person in 30% tax bracket. Suppose an individual has a 30% tax bracket, the effective post-tax return for that individual is 5.6% p.a. The accurate comparison is between 5.6% p.a. and 10% p.a. as there is no tax benefit for repayment of the loan against a fixed deposit.
Break the FD Prematurely:
The second option to avail funding is by breaking the FD prematurely. Breaking FDs prematurely is subject to penalties as mentioned by the bank’s policies. But the penalty is limited to the interest and not the principal.
Another point to consider is apart from the penalty that the banks offer interest rate for the term of the deposit and not the original contracted rate if the FD is closed prematurely.
These two alternatives state clearly that it is better to break the FD than taking a loan against FD. While, taking a loan against FD might not make sense, there are times when it is a wiser choice than breaking the FD.
When Can Loan Against FD Make Sense?
Taking loans against FD only makes sense in the following cases:
- The loan amount is much lesser than the FD amount.
- The interest rates have gone down significantly after the FD was opened.
- The loan tenure is much lower (approximately 20%) than the remaining period of the deposit.
If customers find themselves in the above scenarios, then taking a loan against FD is one of the best options available. Breaking the FD prematurely in such situations does not concur with the primary goal of investing in one.
It is advisable to study all these cases before availing the loan. The main point still stands firm, i.e., investors can use loans against FD to meet the financial emergency at higher benefits than the traditional loans.