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.

This article covers: 

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: 

BanksLoan LimitInterest Rate
SBI Up to 90%FD Rate + 1%
HDFC Bank Maximum Rs. 25,000FD Rate + 2%
Bank of BarodaUp to 95%FD Rate + 1%
ICICI BankUp to 90%FD Rate + 2-3%
CitibankUp to 90%FD Rate + 1-2%
PNBUp to 90% FD Rate + 1%
Axis BankUp to 85%FD Rate + 2%

Source: My Loan Care

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.

Disadvantages of a loan against fixed deposit

  • If a borrower fails to repay the loan, the bank can foreclose on the fixed deposit to recoup the money lent. 
  • The tenure of the loan taken out against the FD cannot be longer than the fixed deposit’s remaining term. 

On a side note: A personal loan could be better and a cheaper option if you don’t have a fixed deposit and need funds on an urgent basis. But in case you have a low credit score and are wondering whether or not you can get a personal loan, read How To Get a Personal Loan With a Low Credit Score to get a better understanding. 

Overdraft facility on fixed deposit

Customers can get a loan against their FD as an overdraft from the banks. An overdraft is a financial instrument, which acts as an extension of credit when your savings or current account balance hits a zero. The fixed deposit-backed overdraft or OD limit is less than the deposit amount. The interest rate is only applied to the amount that is borrowed as an overdraft, and not to the entire limit. 

For instance, if you have a fixed deposit of Rs. 10 lakh, a bank may authorize an OD of up to Rs. 9 lakh. The borrower has the option of withdrawing any amount up to Rs. 9 lakh. An overdraft does not have a set repayment period. The borrower is responsible for paying interest for as long as they hold the money.

When the amount required is less than the funds parked in the FD, taking a loan against it is preferable than liquidating it. For example, let’s say you have an FD of Rs. 10 lakh but only require Rs. 3-4 lakh, one way of meeting the funding need is by taking out a loan. The withdrawal of FD is subject to a penalty if done prematurely. In many circumstances, taking out a loan would be more cost-effective than paying the fine, particularly if the borrower has the ability to prepay it. And the prepayment can have charges applied so make sure to check them out.

One thing to keep in mind is that defaulting on a loan availed against a fixed deposit can have a negative influence on your credit score.

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Manonmayi

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