The Benefits of Taking a Loan Against Fixed Deposit

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Loan against FD
Loan against FD

New Delhi : When you come into possession of surplus funds, a fixed deposit (FD) is the most likely financial instrument you can choose to set aside and save your emergency cash reserve. You also earn high returns on your investment while your principal amount is deposited safely.

But when you're looking to make a big-ticket purchase, like buying a house or land, it's also the first investment you think of breaking to raise the required funds.

But, guess what? There's a much better and faster means to get the necessary money on hand without breaking your FD prematurely. That is – a loan against FD!

What is a Loan against Fixed Deposit?

A loan against a fixed deposit is like any other loan, where you can obtain the required amount and pay back the debt in equated monthly instalments. Banks use your FD as collateral, so the loan is also secured.

Generally, banks offer a loan amount of up to 90 – 95% of the deposited amount in your FD. They also typically charge about a 2% higher interest rate than what you earn on your FD. So, if you earn a 9% interest on your FD, then the interest rate on your loan against FD will be around 11%.

Moreover, you can avail of this loan facility for any type of fixed deposit, including an NRI FD or a domestic one. But on one condition – the tenure of your loan against FD shouldn't exceed the tenure of your FD.

Benefits You Can Enjoy by Taking a Loan Against FD

As a short-term loan, a loan against your fixed deposit can benefit you in a variety of ways, as mentioned below.

1. Easy to Apply

Obtaining a loan against FD is entirely hassle-free. Since you are already an FD customer with your bank, loan approval is typically guaranteed. The only thing you need to do? Fill out a single-page application form. And the bank disburses the amount in your bank account within a few days, if not hours.

2. Competitive Rates of Interest

In comparison to other short-term loans, you can avail of competitive interest rates on loan against fixed deposit. Banks charge anywhere between 0.5% - 2% interest over the applicable FD rate, thereby making it a much affordable option than breaking your investment.

3. Minimal Documentation

When you take a loan against FD, you need not worry about extensive paperwork. As already mentioned above, other than a one-page loan application form, you don't have to furnish any other documents. And since there's minimal documentation involved, the borrowing process is also smoother.

4. No Additional or Hidden Charges

One of the biggest benefits of taking a loan against FD is that there's no processing fee. Also, there are no additional charges or penalty if, in the future, you choose to make part prepayments or foreclose the loan before the tenure is over. As a result, you don't have to worry about extra expense while fulfilling your financial needs.

5. Flexible Repayments

Most banks offer a flexible repayment schedule on loan against fixed deposit. You typically get two options to repay the borrowed amount – monthly instalments (EMIs) or lump sum. However, the repayment tenure is the same as the FD tenure.

6. Earn FD Interest

Taking a loan against FD doesn't mean you lose your investment. As you pay back the debt, the money deposited in your FD will continue to earn interest at the applicable rate. So, you don't suffer any loss of interest on your FD.

To Sum Up

Undoubtedly, borrowing a loan against your fixed deposit is a better way to use your FD investment than liquidating it. Not only can you raise money to meet your short-term financial needs, but also continue to earn interest on your deposited amount – which is clearly, a win-win situation.