Does It Make Sense to Avail of a Loan Against Fixed Deposit?
October 22, 2021 Mutual Fund
Life is uncertain and a financial emergency can occur at any time in life. Most individuals prefer to liquidate their investments or avail of a loan during a cash crunch or financial emergency. However, liquidating your long-term investments is not advisable as it will barge in your long-term financial goals. Although there are several loan options available in the market, availing of a Loan Against Fixed Deposit is the quickest and the easiest way to borrow money, as it is the better option instead of withdrawing it prematurely.
Many people in India still prefer to invest a large proportion of their savings into secured financial instruments. Fixed Deposit (FD) is the most preferred type of investment that offers security and liquidity. Another advantage of having a fixed deposit is that you can get a quick loan at a very low cost. Let’s understand Loan Against Fixed Deposit in detail:
What is Loan Against Fixed Deposit?
A Loan Against Fixed Deposit is a secured loan that can be availed by pledging your fixed deposit as a collateral. Generally, most banks offer up to 85% to 95% of your fixed deposit amount as a loan. Whereas, most Non-Banking Financial Corporations (NBFCs) offer up to 75% of your fixed deposit amount as a loan. The rate of interest for a Loan Against Fixed Deposit varies between 0.5% p.a. to 2% p.a. above the existing fixed deposit interest rates.
What are the forms of Loan Against Fixed Deposit?
You can avail of a Loan Against Fixed Deposit in three different ways:
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Normal Loan:
If you require the maximum amount from your fixed deposit, you should opt for a normal Loan Against Fixed Deposit, where you will get a loan amount up to the loan limit of the bank or NBFC. As stated earlier, you can avail of loan amount up to 95% of the FD value. The interest will be charged on the entire amount like any other EMI based loan.
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Overdraft facility:
In an overdraft facility against FD, the bank or NBFC will sanction a limit-based loan on the fixed deposit value. You can use the amount from your sanctioned limit as and when required. The overdraft facility is advisable when you might need of money, gradually over a period of time. In this facility, you will be charged an interest only for the amount you have utilised and the period you have utilised it for. Unlike a loan, there is no fixed duration of repayment in an overdraft facility. So, you can repay the loan any time before the maturity date of the Fixed Deposit.
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Credit Card:
If you are not eligible for an unsecured credit card but require a credit card then in that case, you can opt for a secured credit card against a Fixed Deposit. Financial institutions generally offer up to 75% of the value of the fixed deposit as a credit card limit. It is advisable that you use the Credit Card Against Fixed Deposit only in emergencies and clear the dues immediately as the rate of interest and late fee on credit cards are very high. Moreover, not paying the credit card bills at the right time in full can negatively impact your credit score.
What are the benefits of a Loan Against Fixed Deposit?
Given below are some of the benefits of availing of a Loan Against Fixed Deposit instead of liquidating your fixed deposit or availing of any other type of loan:
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Lower rate of interest:
Fixed Deposit is the first thing that comes in our mind while investing money. It is hassle-free and a secured loan in nature. The interest rate on Loan Against Fixed Deposit is very low compared to any other type of loan. It typically varies from 0.5% p.a. to 2% p.a. above the existing Fixed Deposit rate of interest. So, you continue earning interest on your FD and pay just a small amount over what you earn. However, if you opt for an unsecured loan, you will end up paying 12% p.a. to 20% p.a. rate of interest on the loan amount.
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No hidden charges:
When you avail of any type of loan, the lender charges you with various types of fees and charges, such as processing fee, foreclosure charges, etc. The processing fee is usually 1% to 2% of the loan amount. However, the banks and NBFCs do not charge any processing fee to process your loan application of Loan Against Fixed Deposit. Moreover, as you can get the loan in an overdraft facility, there are no foreclosure charges to it.
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No need to worry about EMIs:
An overdraft facility in Loan Against Fixed Deposit offers flexibility in repayment. Since it does not have any fixed repayment period, you can repay the loan at your convenience, either in a lump sum or in instalments. However, you can not extend the repayment above the maturity date of the Fixed Deposit.
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No need to liquidate Fixed Deposit:
Since the loan is backed up by the Fixed Deposit which is a secured financial instrument, the margin amount is lower. Hence, you can get a loan up to 90% of the value of the Fixed Deposit. Whereas, when you opt for a Loan Against Securities, which is secured by the market-linked financial instruments, the marginal amount is much higher compared to the Loan Against Fixed Deposit as the risk to the lender is higher.
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Minimum documentation:
You do not have to submit multiple documents when availing of a Loan Against Fixed Deposit as the loan is secured with your Fixed Deposit. As you have already submitted your KYC documents prior while opening the Fixed Deposit, you do not have to submit them again. Hence, in most cases, an applicant only needs to submit the receipt of FD along with the Loan Against Fixed Deposit form. Once the lien is marked to your fixed deposit, the loan will be immediately disbursed in your saving account.
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Quick loan disbursal:
Loan Against Fixed Deposit is the quickest way to borrow loan at the lowest rate of interest. As there is minimum documentation required and fewer formalities. Your loan gets disbursed as soon as the fixed deposit amount is lien marked, which usually takes 1 or 2 working days. So, you do not have to wait for the loan to get approved and processed to get the fund in your saving account.
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Anyone can apply:
The Loan Against Fixed Deposit is available for anyone that holds a Fixed Deposit in a bank or NBFC that offers this facility. So, individuals, senior citizens, joint FD holders, etc. can opt for the facility if they hold a Fixed Deposit. However, the facility is not offered to minors (even if a minor is a joint holder with an adult) and investors of a five-year tax-saving fixed deposit.
What are the disadvantages of Loan Against Fixed Deposit?
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The most important drawback of availing of a Loan Against Fixed Deposit is that if you fail to pay the full loan amount before the maturity date of your fixed deposit, the bank or NBFC holds the right to liquidate your Fixed Deposit in order to recover the due amount. If the FD is done to achieve a specific financial goal, such as a child's education, then failing to repay the loan can interrupt such goals.
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You cannot apply for the Loan Against Fixed Deposit immediately after you book an FD. Most banks allow this facility only after the completion of the three months from the FD start date.
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Not everyone can apply for this type of loan. If you have a 5-year tax-saving fixed deposit or a joint FD with a minor, you can not apply for a Loan Against Fixed Deposit.
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If you do not repay the loan as per the agreement, it can damage your credit score.
How to apply for a Loan Against Fixed Deposit?
You can avail of Loan Against Fixed Deposit either online or offline. However, most banks have a maximum limit of Rs 25,000 for availing of an online Loan Against Fixed Deposit, which you can apply for by logging into your internet banking. For any amount above this limit, you can visit the nearest branch of the bank or NBFC with a physical or digital Fixed Deposit receipt. The bank/NBFC will provide you with an application form which you will have to fill, sign and submit to them along with an FD receipt and your consent to mark lien on your fixed deposit.
To Conclude:
Fixed Deposit is the traditional way of investment since ages. Whenever there is an emergency, we seek loans by pledging various asserts, but many of us are not aware that we can even avail a loan against Fixed Deposit. The Loan Against Fixed Deposit is a great way to borrow funds if you hold a Fixed Deposit and have the ability to repay it within the loan agreement period then look no further and consider your Fixed Deposit, Moreover, it is a good idea to avail of this loan when you need less amount than your FD value. However, if you require a loan amount of only 20% to 30% of the fixed deposit value, it does not make sense to lien mark your entire FD. In such cases, you should avail of a small unsecured loan. Furthermore, it is advisable to not risk your FD if the fixed deposit is made for a specific long-term goal that you cannot compromise on and you have doubt about your repayment capacity.
This article first appeared on PersonalFN here
