Fixed deposit: Loan against FD is cheaper, easier than other loans for short-term needs; when should you go for it? If you have a fixed deposit and want a loan, the bank will lend you the money against your deposit. How much loan can you take against your FD? What will be the interest rate, tenure, processing fee, repayment schedule? When should you opt for it? All questions answered
When you are in urgent need of cash, the first option that comes to your mind is to take a personal loan or use your credit card if it has sufficient balance. But it may not be a prudent decision considering the extremely high interest rate charged on credit card dues in case you do not repay the entire amount by the due date, and higher rate on personal loans, especially after the continuous hikes in interest rates over the past two years. Moreover, before extending an unsecured personal loan, banks usually look at your entire financial profile which takes time and effort. What if you could have another option to borrow money apart from a personal loan in times of crisis?A loan against your fixed deposit (FD) is one of the most cost-effective and easiest possible loans available in the market. If you have a fixed deposit and want a loan, the bank will lend you the money against your deposit. No additional documentation, no credit history check, comparatively low-interest rate, and fastest disbursal have made loans against FD popular among investors.
How much loan can you take against your FD?
Credit against FD for retail customers typically comes in three forms – a demand loan, an overdraft and, a credit card. In a demand loan, there is no fixed tenure as you can repay it as per your convenience before the agreed deadline which must be before the maturity of the loan. You can pay it in a staggered manner as well at once.
However, many banks usually offer credit against fixed deposits in the form of an overdraft (OD) facility. When you ask for an overdraft against your FD, the lender sanctions a credit limit against your FD as collateral. The credit limit is usually in the range of 70-95 per cent of the deposit amount. Some banks can even offer more than this range. The amount of the loan varies from bank to bank and also upon the amount deposited.
You can withdraw up to the sanctioned amount from the overdraft account and repay it as per your repayment capacity. The interest is incurred only on the amount withdrawn, not on the entire amount sanctioned.
"The loan against FD offers borrowers the freedom to borrow from the sanctioned limit multiple times as per one’s requirements, repay the drawn amount as per one’s repayment capacity and incur interest cost only on the drawn amount," said Naveen Kukreja, Co-Founder and CEO, Paisabazaar.
Loan against FD interest rate: Cheaper than other loans
One of the biggest advantages of loans against FD is that it is cheaper than personal loans or most secured and unsecured loans. "The interest rate could be slightly lower than the personal loan for the same duration," said Ajinkya Kulkarni, Co-founder and CEO, Wint Wealth.
Banks charge an interest rate that is 50-200 basis points higher than the interest rate paid by the FD.
"Loan against FDs could be the least expensive of secured loans. With FD rates averaging 7.5 per cent, you can get a loan against an FD for as little as 8.5 per cent, making it cheaper than the other loans," said Adhil Shetty, CEO, BankBazaar.com.
"If you are taking a loan against an FD at 5.5 per cent invested a year ago, then your interest rate could be typically around 6.5 per cent. But if you are taking the loan against the FD that was invested some months or weeks back at 7-7.5 per cent, the cost of the loan would be 8-8.5 per cent," Shetty mentioned.
Loan against FD: No processing fees, quick disbursal
There are usually no processing fees in loans against fixed deposits unlike home and personal loans. "Most banks offer a loan against FD without any processing fee and with fewer formalities since it is a secured loan," said Ajinkya Kulkarni, Co-founder and CEO, Wint Wealth.
Loan against FD: Loan tenure and repayment are flexible
The maximum loan tenure that you get in a loan against FD is the term of the deposit itself. "As the loan is disbursed as an overdraft, you can repay it as and when funds are available. You do not have to pay it in EMIs," said Abhijit Talukdar, a SEBI Registered Investment Adviser and Founder, of Attainix Consulting.
But do keep in mind that if your FD matures in seven months, you have to complete the loan before seven months. You cannot close the FD unless you pay off the loan amount.
Banks usually do not levy any penalty in case of foreclosure on the loan against a fixed deposit. If unpaid till maturity, the loan is adjusted against the fixed deposit proceeds.
When should go for a loan against FD?
Loan against fixed deposit could be a great option for those looking to avail of a loan at a cheaper rate compared to personal loans where the interest rates range from 10.5-21 per cent per annum. It is easy to get a loan against your fixed deposit. Usually, when a borrower applies for a loan, the bank checks his or her income, repayment capability, and credit score. In the case of loans against FD, the lenders usually waive these checks as it is a secured loan against a highly liquid collateral.
"It is one of the most cost-effective and quick options to access funds. Since it is usually in the form of an overdraft where you pay only when needed, it can be a good option where there is a need for short-term/temporary funds. Further, paperwork tends to be minimal," said Vishal Dhawan, a SEBI-Registered Investment Advisor and Founder of Plan Ahead Wealth Advisors.
“If you need some cash for the short-term, it is wise to consider a loan against FD instead of premature withdrawal as it comes with a penalty,” said Abhijit Talukdar, a SEBI -Registered Investment Adviser. For example, if you have a fixed deposit of Rs 5 lakh and you need Rs 1 lakh urgently, you may not want to break the entire deposit. In such scenarios, a loan against FD would be a wise option. Do keep in mind that five-year tax-saving FDs cannot be used for availing loans, he added.
“This can be very useful for those who have never borrowed and hence have no credit history. They can use a loan against FD when they need funds (and don’t want to use up all their FD savings as well) and build their credit score as well,” said Dev Ashish, a SEBI Registered Investment Advisor and founder of
StableInvestor.
Loan against FD can be a more cost-effective alternative for consumers having poor credit scores or poor credit profiles as lenders usually set higher interest rates for personal loans for those having poor credit profiles, said Kukreja.
"An investor should only seek a loan against FD when he or she is confident of his future cashflows to meet the repayment obligations. If she misses an EMI payment, the bank has full rights to recover the entire loan amount from her FD collateral. Thus, he or she not only loses the FD corpus but would also have a dent in her credit history," said Kulkarni.
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This story originally appeared on: India Times - Author:Faqs of Insurances
