Indian investors are no strangers to fixed deposits or FDs. A SEBI survey corroborates their popularity in the country, stating that more than 95% of Indian households prefer to park their funds in FDs. Only 10% prefer investing in mutual funds and stocks. The reasoning behind this is simple: FDs are guaranteed investments with a high degree of safety.
With rising interest rates, more borrowers are choosing to deploy their FDs as collateral against secured loans. In fact, loans against FDs rose 43% in the last fiscal year, which is the highest rate in nearly a decade. As a cost-effective and simple option, a loan against FD allows borrowers to meet urgent requirements without scrambling to find collateral.
Here is a detailed look at the process, its benefits, and the best time to opt for a loan against FD.
Loans Against FD: A Brief Guide
If you have an FD and are in need of funds, you can merely apply for an overdraft or OD. Your FD acts as the collateral or security against which you can use the overdraft facility and borrow funds. The loan’s value can be up to 90% to 95% of the deposit amount and is based on the FD amount. The exact LTV you get may vary depending on the lender.
A highlight of this facility is that there is no need for you to attach additional documentation or for the lender to run a credit history check. Sanctions are issued quickly and usually with nil processing fees, as lenders are keen to extend loans against FDs to existing customers. This means you can get access to financing easily and quickly, without any hassles relating to paperwork or credit score.
FDs are low-risk investment instruments. However, they are exposed to slightly higher risk when used as collateral. This is because in case of a lapse in repayment, the lender has the full authority to liquidate your FD to recover funds. So, make sure to repay the loan before your FD matures.
How is Interest Calculated for Your Loan Against FD?
An FD OD typically carries an interest rate that is 100 to 150 basis points higher than the interest rate on FD. This means that your loan against FD interest rate will be around 1% to 1.50% higher than the FD interest rates you get.
So, it is possible for you to obtain financing at 8–9%, which is significantly less than the interest rate on a personal loan. The latter typically charges between 10-13% or more as interest. In addition, you only pay interest on the OD amount withdrawn rather than for the entire sanctioned limit.
How to Apply for a Loan Against FD?
You can easily apply for a loan against FD online by logging into your account on the lender’s website. The next steps are as follows:
- Click on ‘Fixed Deposits’
- Select ‘Overdraft Facility against FD’
- Provide details such as the required loan amount, tenor, and more
- Start using the OD facility to withdraw funds according to the issued limit
The following types of FDs are not available to be used as collateral for a loan:
- FDs in the name of a minor
- 5-year tax-saving FDs
When to Choose a Loan Against FD vs Other Collateral?
There are many situations where using a loan against FD is a better option. A few of these are as follows:
To Avoid Premature Withdrawal
Say you are in dire need of funds to meet a short-term requirement, but your FD maturity is still far away. You do not want to break your FD as this will attract premature withdrawal penalties. By opting for an OD facility, you can still avail funds without adding to your debt.
To Use Purely as Collateral
It may be that you do not have other assets to pledge for a secured loan or that you do not wish to place another asset in the scope of a lien. In these cases, you can utilise your existing FD to get loans at low interest rates.
To Combat Poor or Non-existent Credit History
If you are a first-time borrower, your lack of credit history can be an obstacle in the loan approval process. In other instances, you may have a poor credit score, and lenders may be charging you high interest rates for low loan amounts. In either of these cases, you can opt for a loan against FD. Timely loan repayment can help you build a good credit history for future needs.
To Meet Emergency Fund Requirements
When faced with an urgent need for funds, you can easily withdraw money against your FD, typically via your savings account. This ease of use helps you with liquidity during emergencies.
Advantages of Opting for a Loan Against FD
The benefits of opting for a loan against FD make it a more convenient choice as compared to other loans. These are as follows:
Lower Interest Rates
When compared to other credit products, such as personal loans and credit card loans, loans against FDs are much more cost effective. For instance, if you invest when the interest rate on FD is 5.50%, you can secure financing at around 6.50% to 7% interest. This is a very affordable rate to pay and makes repayment easy on the pocket.
Free of Processing Fees and Pre-Closure Charges
Most lenders offer loans against FDs without charging any additional fees. As it is a secured loan offered to an existing customer, disbursal is also usually smooth and quick. There are also no foreclosure charges levied on such loans.
Flexible Repayment and Tenor
The maximum tenor that you can get in a loan against FD is the term of the deposit itself. You can repay the loan as and when funds are available and not necessarily as EMIs. However, the loan has to be paid off before the FD matures. The FD will not be closed until the loan is paid, and if the loan remains unpaid till maturity, it is adjusted against the FD balance.
A loan against FD offers a slew of benefits, making it very attractive for borrowers. However, it is important to remember that you should opt for FDs based on your investment portfolio and goals as well as your appetite for risk.
Before taking a loan against your FD, ensure you plan timely payments to avoid risking your FD corpus. Lastly, consider all the options available to you before opting for a loan against FD.
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