The What and How of Loans Against Fixed Deposits
Fixed deposits, as Vinay Maan learned, is a smart way to save money and earn good returns for the future. Although he had to wait for the returns until the expiry of the tenure, he wasn’t worried. He was faced with an emergency and didn’t know if he should break the FD. However, his friend Alok advised him against it and told him to take out a loan against FD instead. Here is the what and how of taking out loans against your FDs.
As a part of smart financial planning, you must manage liquidity properly. If you’re suddenly faced with an emergency,
you might sell your assets for a lower value. But with FDs, you can smartly arrange for the emergency cash without breaking them. You may also get a lower interest rate in comparison to other personal loans.
Why Loans Against FD?
Why would you rather go for a personal loan against FD than a traditional one? Usually, you get a lower interest rate on loans against FDs and you don’t stop earning interest on your FD amount. The good news is that loans against FD entail less documentation and the approval is guaranteed. However, you can avail a loan only after about 90 days from the FD’s start date from your lender.
Loans against FD are easier to obtain and you save a lot of money that you’d have to pay as interest if it was a traditional loan with no security. You can easily obtain a personal loan against an FD in less than a day. All you have to do is fill up an application form, have documents such as FD receipts, and other documents like a pledge letter and overdraft agreement as per lender requirements.
Types of FD Loans:
FD loans can be broadly divided into two categories:
- Demand loans:
This is the most common form of FD loan. Here you can avail up to 90% of the FD principle amount as a loan. For instance: Suhas had an FD of Rs 10 lakh. When his mother fell ill and he required immediate cash, he took a loan against his FD. He got a loan of Rs 9.9 lakh. The interest rate was lower than a traditional personal loan. Also, there was a period of 5 years still left for his FD to mature. So, his Equated Monthly Installments (EMIs) were spread over the same period. This ensured less strain on his financial health as well.
- Loans against FDs:
This loan utilizes an FD for security against the loan. You can avail 75% of the FD amount for a Cumulative FD and 60% of the FD amount for a Non-Cumulative FD. For example, Rajiv wanted a loan of Rs 7.5 lakh for his new luxury car. He got a loan of Rs. 6,00,000 against his FD of Rs. 10,00,000.
How Is the Loan Given?
Loans are given in the form of a laon against fixed deposit you have with your lender. This is an option given to you instead of breaking the deposit before the tenure ends. The loan amount that is given is up to 75% of the total amount based on the type of FD you’ve set up with your lender. But this amount varies from lender to lender.
What’s Your Eligibility?
If you’re a resident individual (except foreign nationals, POIs or NRIs), or a Hindu undivided family, a self-employed individual, a partnership firm, a company, a club, association, or society, or a family trust, you are eligible for a loan against your fixed deposit. You may visit the lender website as they list all the details there.
What Are the Interest Rates and Charges Involved?
For loans against FDs, your lender will offer you lower interest rates as compared to personal loans. Usually, the lender doesn’t have charges for prepayment or foreclosure but this differs from lender to lender. Your lender may charge you a processing fee but they may decide to waive it, some lenders don’t charge processing fees for these loans.
What Are the Tenure and Payment Options?
As a given, lenders don’t offer a loan tenure that is more than the tenure of the deposit itself. As for payment options, you’ll be required to pay them back in EMIs or as per lender guidelines.
So, if you’re looking to avail a loan for an emergency, loans against FDs are a good alternative. The interest rates are low, and you don’t stop earning interest on the amount deposited. But, you also can’t avail tax deductions on the interest you pay for a loan against an FD. However, in the unlikely scenario that you’re unable to pay back the loan within the time specified, the lender may foreclose the fixed deposit to get the money lent to you.