Is a loan against fixed deposit the right option for you? Find out
Loans against fixed deposits from banks and NBFCs allow individuals to borrow using their deposits as collateral. This option offers quick access to funds with minimal paperwork and competitive rates, ideal for addressing sudden financial challenges while preserving investment strategies.
If you aspire to invest in India you have many different investment options. Fixed deposits, equities, mutual funds, gold, other commodities etc. These are all different kinds of asset classes.
Now fixed deposits which are a unique investment asset class is a favored investment choice due to their stability and predictable returns. Since life is unpredictable that is why it is often seen that there are times when due to emergencies of different kinds like medical, financial etc., money is needed.
So to meet such sudden, unplanned liquidity needs even before one's fixed deposit matures there is an option of borrowing money by keeping one's fixed deposit as a collateral.
Hence, simply put, some financial institutions provide personal loans against fixed deposits offering a quick resolution to access funds when the situation becomes unavoidable and financially challenging for individuals.
What is a loan against a fixed deposit?
A loan against a fixed deposit (FD) allows the borrower to borrow money using his or her deposit as collateral without breaking it. The idea here is that you put your entire fixed deposit as a collateral in exchange of the loan and once you repay the loan your fixed deposit is freed.
This option typically requires minimal documentation and provides fair and competitive interest rates. Thus making it an excellent alternative to traditional personal loans.
How does it work?
- Eligibility criteria and application: To qualify for a loan against an existing FD, one needs to hold an FD account with a bank or non-banking financial company (NBFC) that offers this service. Post the completion of basic inquiry, applications can be submitted online or in-person.
- Loan amount that can be opted: Generally, a borrower can borrow 75-90% of their FD's value. This depends on the institution's policies.
- Interest rate applicable: The interest rate applicable on such a loan is usually 1-2% above the FD’s interest rate. Thus making it more affordable than unsecured loans.
- Repayment terms and conditions: The repayment period normally aligns with the remaining tenure of the FD. This condition requires repayment before the FD matures.
- Processing charges and associated fees: Many banks charge little to no processing fees. Some banks may waive prepayment penalties, adding convenience. Consulting the designated customer support team can help in clear understanding.
- Implications of such a loan on FD: Now in normal cases, FD continues to earn interest in usual fashion, unless there is a default on the loan repayment. Any default on the repayment or error can result in liquidation of the deposit.
Key considerations before applying for a loan through this method
- It is crucial to review all terms and conditions carefully.
- If in doubt consult the respective bank or financial institution.
- Speak to the customer support staff to overcome doubts.
- If doubts still remain, speak to trained investment professionals.
- Compare offers from various financial institutions for the best deal.
- Assess how borrowing might affect your overall returns on the FD.
Hence, loan against a fixed deposit can even be a smart financial move depending on the prevailing situation. Especially for those needing immediate financial assistance. All this while ensuring that they are able to preserve their investment strategy.
Prominent Indian banks and lending institutions i.e., Non-Banking Financial Company (NBFCs) that can be referred to for availing such loans are: HDFC Bank, Kotak Bank, ICICI Bank, Bajaj Finance, Chola Finance, Shriram Finance among others.
Further, emphasis should be given to lenders who can provide easy availability of funds in a seamless way along with minimal documentation. Not only this but the terms and conditions, along with the interest rate charged also needs to be reasonable on the borrower. This way this loan option can be ideal for both planned and unplanned expenses.
(Note: Raising a loan comes with its own risks. So, due caution is advised)
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