What do you do when you have sudden expenses to meet? When heavy expenditure knocks at your doorstep, you might think of dissolving your savings. But what if there’s a better approach than this? Instead of liquidating your hard-earned savings, avail a personal loan against a fixed deposit.
When banks provide loans, they typically charge around 2% points more than the FD rate. The loan against FD works in the same way as any other loan. The borrower receives money in a single payment and repays it in monthly installments.
FD is a possible way to get a loan, and a loan on fixed deposits is a savior that helps people get quick solutions during any economic crisis.
In this article, we are diving deep into the concept of loans against FD.
What Is a Loan Against FD?
A loan against FD is a secured loan where customers can pledge their fixed deposit as security and get a loan in return. The loan amount solely depends on the fixed deposit, and it can go up to 70% to 90% of the deposit amount.
A loan against FD can meet unexpected financial needs. People tend to choose loans against FD when they encounter unforeseen events like medical emergencies, marriages, etc. The loan against the FD interest rate varies from bank to bank.
Who Can Apply for a Loan Against FD?
The loan against FD is an extended service to all the deposit holders, whether an individual or a joint account.
Notably, the applicant should be a resident of India, family trust, Hindu Undivided Family, association, and society. Moreover, sole proprietorships, partnership companies, and group companies are also eligible to apply for a loan against FD.
Who Are not Eligible for a Loan Against FD?
- Fixed deposits in the name of minor individuals are not eligible for loans.
- A 5-year tax-saving FD investors cannot apply for loans against FD.
Benefits of Loan Against FD:
- No Penalty Interest on a Premature Exit: You do not have to make an early withdrawal from your FD if you take out a loan against it. In this manner, you can avoid paying the penalty interest on a premature exit.
- Zero Processing Charge: The applicants need not to spend money for applying for a loan against FD, it is free of cost
- Minimum Interest Rate: A loan against FD has a minimum interest rate compared to a personal loan.
- Seamless Loan Application Process: The loan application process is seamless since there is no or less documentation process involved
- Available for Both Domestic and NRI FD’s: A loan against FD is applicable for both domestic and NRI fixed deposits.
Features of Loan Against FD
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Get Loan Amounts up to 70% to 90%
A loan against FD is a good choice for the customers since it can ensure 70% to 90% of your fixed deposit. It is the most notable benefit of a loan against FD. For instance, if you have a fixed deposit of 10 lakhs, you can avail of anything ranging from 7 to 9 lakhs. Customers will receive the interest of the remaining amount from the FD even after the sanction of the loan.
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Low-Interest Rates
Loans against fixed deposits have substantially lower interest rates than other loan types. Let us say that it is only 2% to 3% higher than the fixed deposit rate. For example, if your bank gives 9.25% on fixed deposit accounts, you will have to pay 11.25% on your loan against the FD. Compared to the interest rate charged by banks on personal loans, this rate is far lower.
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Flexible Payment Mode
One critical element is that the loan against FD has the same duration as the fixed deposit itself. While the loan’s tenure may be smaller than that of the fixed deposit, it may not surpass the deposit’s tenure. For example, if the Fixed Deposit tenure is five years, the loan can be less than or equal to 5 years but not more significant than that.
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No Processing Fees
There is no processing fee for this type of financing, and it requires zero payment and additional processing charges; the case is different from other loans. As a result, the overall cost of the loan is reduced.
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Hassle-Free Processes
The application process is quite simple, and this is one type of loan that is extremely simple to apply for. There is relatively little documentation required because you already have a fixed deposit account. You only need to complete the necessary forms, and you can also apply for a loan against a fixed deposit online.
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Meet the Financial Needs Without Breaking the FD
Unfortunate circumstances, catastrophes, and unexpected developments may cause many people to withdraw funds from their fixed deposit accounts for immediate cash flow. However, with the option of taking out a loan against a fixed deposit, you may maintain your deposit while meeting your immediate cash demands.
What Is the Overdraft Facility on FD?
Overdraft against FD allows you to withdraw up to 85% to 95% of the fixed deposit amount. The bank charges interest only on the amount withdrawn from the overdraft, never on the whole overdraft limit. The interest rates charged on your fixed deposit investment are 1% to 2% above the fixed deposit rates.
The maturity of the fixed deposits decides the tenure of the loan. If the payment is not made, it will be adjusted from the fixed deposit.
An overdraft can be closed without incurring any prepayment penalties.
There is no or fewer paper works and eligibility involved in the whole process of overdraft against FD.
Assume you obtain an overdraft of Rs 1 lakh from a bank at an interest rate of 8% p.a. You withdraw Rs 10,000 from your OD account, use it for 20 days, and then re-deposit it into your OD account. The bank will only compute interest on Rs 10,000 for 20 days, which might amount to Rs 43.
As a result, an overdraft against FD can be considered a regular liquidity instrument to cover a short-term requirement. Another advantage of having an overdraft is that you don’t have to worry about monthly EMI payments, and you can deposit the outstanding amount whenever it is convenient for you.
FAQ’s
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What is the interest rate of the loan against FD?
The interest rate of loans against FD is 2% to 3%.
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What are the application processing charges to avail Loan against FD?
There are no application charges to be paid to get a loan against FD.
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How much loan can I get against my FD?
It varies from bank to bank, but one will get 70% to 90% of the deposit amount.
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Is overdraft against FD a good choice?
Overdraft against FD can be employed regularly to address a short-term liquidity requirement. Another advantage of having an overdraft is that you don’t have to worry about monthly EMI payments, and you can deposit the outstanding amount whenever it is convenient for you.
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