Taking A Personal Loan Against Your FD: Is It a Good Idea
They say you cannot have the best of both worlds. You need to choose one option and let go of the other.
Unless you are talking about a personal loan against fixed deposit (FD), of course.
Desperate times call for desperate measures. During a financial crunch, you may want to liquidate your FD. This means you might consider breaking your FD to get the money you need. That may solve your financial problem.
But then your savings go for a toss. A good way to deal with this is to take a personal loan against your FD. You then get a short-term loan without breaking your FD.
Here are some factors you must consider before opting for such a loan.
Let’s Understand Each Factor in Detail:
How Much Loan Can You Take?
Banks and non-banking financial companies (NBFCs) usually offer a loan up to 90% of your FD amount. For example, say you have an FD of Rs 3 lakh. Then you can get a loan of up to Rs 2.7 lakh. But you must keep the loan tenure in mind. It cannot exceed the tenure of your FD.
What Are the Charges Involved?
When you take a standalone personal loan, you pay interest between 12–22%. The interest rate is lower in the case of loan against FDs. You pay an interest that is a percent or two higher than your FD interest rate. Say, your FD offers 8% interest. Then you may have to pay around 10% for your personal loan.
Most lenders charge a penalty if you make premature withdrawals from your FD. The penalty rates vary between 0.5 and 1%. In such cases, your returns reduce because of the penalty. You can skip these charges if you take a loan against the FD. Such loans have no prepayment penalties. They also charge only a small processing fee. Besides, lenders may waive some of the fee if you have a good relationship with them.
What Is the Repayment Schedule?
Such loans have a flexible repayment schedule. You can repay your loan in instalments. Or you could pay a lump sum when your FD matures. Some lenders may ask for monthly repayments. But many customers prefer to repay the loan at maturity.
How Long Does It Take to Get an Approval?
Obtaining a loan against your FD is a simple process. The approvals do not take much time either. Your loan approval may come through within a day. This is because the lender already has your basic details. But you might have to submit extra documents along with the application form.
The bottom line:
A personal loan against an FD offers many benefits. But you must make a thoughtful decision. If you default on the repayment of your loan, the lender will close your FD. Such defaults hurt your credit score too.