Loan Against FD: Things To Keep In Mind Before Taking Loan Against Your Fixed Deposit

There are many options available for taking a loan. Provided that for this, your credit score should be good and your monthly income should be able to assure the lending bank or financial institution that you can repay the loan amount with interest on time. In such a situation, your financial history matters a lot. Better financial history gives confidence to the lending bank or financial institution to lend without hesitation. At times like these, your investments can help you, especially when you feel that you do not have any collateral to take a loan.

An emergency can cripple any person financially and when it comes, people are often confused about where to borrow. In present times, it has become very easy to raise funds in case of emergency, currently, many retail credit products are easily available to deal with such situations. One of these products is a loan against a fixed deposit (FD). Let us know about it.

What is a loan against FD?

A loan against a fixed deposit is known as a loan against FD. This is a secured loan. In which FD holders can avail of loans against their fixed deposits. Loan against FD is easily available in most banks or financial institutions. Nowadays it has become a popular form of obtaining credit. In a report released earlier by Bank Bazaar called 'Moneymood' report, it has been told that loans against FD have increased by 16.47 per cent on an annual basis. Loan against FD has increased to Rs 113.9 crore in 2023 as compared to Rs 97.5 crore in 2022.

Before taking a loan against FD, it is very important to understand its features. You can also find out whether the loan option against FD suits your needs or not. Know these things before taking a loan through this option:

Also Read: Taking Loan Against Property? Here’s Everything You Need To Know

Interest Rate

The interest rate affects your ability to borrow. Loans against FD generally put less burden on the pocket than other options. In this option, the interest rate on loan on FD is 0.75 per cent to 2 per cent more than the interest received on the investment amount. This is because the FD acts as collateral, which reduces the lender's risk, allowing them to offer lower interest rates. However, in some cases, this rate may be lower than the rate offered on unsecured loans like personal loans, which usually charge interest starting from 10 per cent and above. Apart from this, in the loan option on FD, the interest rate is fixed, in such a situation the person taking the loan remains protected from the fluctuations in the interest rate. This is usually seen in some secured loan categories.

Loan Amount

The loan amount available under this type of loan option generally starts from 85 per cent of the deposit amount and above. However, some banks or financial institutions may have a minimum deposit requirement to offer loans against FD.

Process and paperwork for loan against FD

Like fixed deposits, the loan option against FD is processed instantly and loan approval is also completed in less time. This is because FD acts as collateral. In such a situation, it eliminates the need for comprehensive verification of the financial history of the person taking the loan. As a result, the loan is processed with minimum documentation.

Collateral and Guarantors

In the case of a loan against FD, the person taking the loan retains the ownership of the FD which acts as collateral. Such loans are secured with FD, in such a situation the borrower does not need an additional guarantor, thus making the loan process simple and fast. FD continues to earn interest during the tenure of the loan at a pre-determined rate which the borrower can use to pay the outstanding interest on the loan.

Repayment tenure and prepayment

The repayment terms for loans against FD are usually flexible and the borrower can repay it in instalments (EMIs). However, repayment should be done before the maturity of the FD. As a result, the loan repayment tenure is fixed, which provides convenience to the borrower in his financial planning. Additionally, many lenders may not charge prepayment charges on this type of loan, which are typically charged on other types of loans.

Repayment tenure and prepayment

The repayment terms for loans against FD are usually flexible and the borrower can repay it in instalments (EMIs). However, repayment should be done before the maturity of the FD. As a result, the loan repayment tenure is fixed, which provides convenience to the borrower in his financial planning. Additionally, many lenders may not charge prepayment charges on this type of loan, which are typically charged on other types of loans.