Runnning Out of Money? Here’s How FDs Can Help
Rajiv had lost his job a couple of months back due to downsizing at his firm. While he was trying to find a decent job, his wife’s back ache started acting up again. His wife had to be admitted to the hospital and she needed a surgery. In the past couple of months, Rajiv had used his emergency portion. He needed more money for the treatment. Unfortunately, all his investments were locked up for a few months. This put him in a real fix and left him without many options. He decided to break his fixed deposit (FD) and use the money. However, his friend advised him to instead choose a loan against his FDs. He took a loan against FD, paid for the surgery, found a job and repaid the loan soon enough.
Emergencies come unannounced in life. It could be business-related or could be a medical emergency as in Rajiv’s case. Let’s look at the features of loans against FDs:
What is Loan against FD
Whenever there is an emergency, you may not always have the required funds to tackle it. However, instead of prematurely breaking your FD, you could opt for a loan against the FD. Lots of banks and financial institutions offer loans against FDs to borrowers.
How’s it deployed
The loan amount offered can vary between different lenders. Typically, the loan amount is in the range of 70%–90% of your FD amount. It is even possible to avail a higher amount. However, this depends on your credit history and lender’s discretion.
The loan process
Say you have a fixed deposit of Rs. 2 lakh for three years with a financial institution. The FD earns a 9% rate of interest. Now you have an urgent short-term requirement of Rs. 10,000 for a month. The lender offers you the loan at an interest rate of 11%.
At the end of the month, you repay the amount with the interest. Thus, your FD remains intact while you addressed your requirement.
Repayment of the loan
The maximum tenor for the loan is the remaining term of the FD itself. This is decided by the lender at the time of disbursal. The interest rate on the loan is typically 2-2.5% higher than the interest rate on the FD. You could have flexible repayment options on the loans.
Unlike a regular loan, the processing fee is waived by most lenders for loans against fixed deposits. This is beneficial for borrowers as they receive the total amount without any deductions. Additionally, many lenders, like Bajaj Finserv, do not charge any foreclosure charges too.
Advantages over a regular loan
The best advantage of this loan is its disbursal time. During emergencies, you require the funds as soon as possible. For a regular loan, you may need to wait for days, if not weeks to get the funds. However, in the case of loan against FD, the funds could be disbursed within 24 hours. Also, the interest is charged on the total amount you borrowed.
The next time you require funds for a short period, you could consider availing a loan against your FD like Rajiv. However, it is important that you use this facility carefully since the lender can forfeit your deposit in case you default on your payments.