Raina was visiting her home town for a couple of days. Her mom was not very financially savvy and asked Raina to help her open a fixed deposit at the nearby bank branch. She accompanied her mother to make a fixed deposit of around Rs.1.50 lakhs. When she returned home after a few hours, she saw a message in her mom’s cell phone, which said that her mom can take a loan against the fixed deposits. She was intrigued by the message and was interested to know more about loans against fixed deposits.
In this article, we will try to understand the nuances of loans against fixed deposits, who should take it and what are the advantages of taking loans against fixed deposits.
Fixed deposit is one of the safest ways to save your money. Once you open an FD, the amount is locked for a certain sum of money. FDs pay a fixed rate of interest over a time frame, and you can choose between the cumulative option and the regular payout option. There are various tenures of fixed deposits. You can have a fixed deposit for seven days to 10 years.
Life always tends to throw curve balls when you least expect it. During such times, you may face with a cash crunch, and you may be tempted to take a personal loan or break your fixed deposits. But there is a better way of getting over the cash crunch by getting a loan against your FDs. The amount saved in an FD will act like security/ collateral, and you don’t have to break the fixed deposit, which will continue to earn interest.
The loan amount that can be disbursed is a percentage of the amount in fixed deposit. For many banks, it is typically 90% of the FD value. For, e.g., your FD amount is Rs. 1 lakh, then you would be eligible to receive a loan worth Rs.90,000.
One can get a loan against fixed deposit at a lower rate of interest than other types of loans. However, the interest rate will be higher than the interest received on the fixed deposit. The rate of interest charged is generally 1% to 3% higher than the FD rates.
This means that if you are earning an interest rate of 7% on your fixed deposit, the loan will be granted at the rate of around 9%. This is way less than the average loan interest rate charged, which may be beyond 10%. You should keep in mind that the rate of interest will differ from banks to banks. Also, the term of the loan taken against the FD cannot be more than the FD term.
Loan against FD can be very beneficial for people with low credit scores or people who are not able to secure loans through the conventional bank loan process.
Loan against a fixed deposit comes with zero processing fees. This will help you save on the costs involved in getting a loan. Also, minimal documentation is required for processing the loan.
Many charge a certain percentage as a prepayment penalty to their customers. However, it is not so in the case of loans against fixed deposits where customers can pay back the loan amount before the tenure without paying any fees.
The customers have flexible repayment option in the form of lump sum and instalment based payments. For example, if you receive lump sum cash in the form of gifts or bonuses, you can use the money in paying off your loan.
NRIs who have invested in NRI fixed deposits can also apply for a loan against their FD. Many banks in India offer this facility.
• Minors cannot apply for a loan against FD
• Joint bank FD holders can also apply for a loan
• The loan facility is not available in tax saving FDs
• You won’t be able to break the FD during the loan tenure
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