We often underestimate the worth of a fixed deposit (FD). Many focus on the not-so-premium returns of FDs, comparing them to equity or crypto investments. However, fixed deposits are not only meant to offer relief during emergencies; they can even be used as collateral for loans, or in other words, you can get a loan against FD.
What are loans against FD?
A loan against Fixed Deposit (FD) is a type of secured loan that banks and financial institutions offer. The borrower receives this type of loan against the security of their fixed deposit account. In other words, the fixed deposit serves as collateral for the loan.
The loan amount is equivalent to a certain percentage of the fixed deposit amount—usually around 70-90% of the deposit. The borrower can access the loan amount without breaking the fixed deposit. That means they can continue earning interest on their deposit even while they take a loan against it.
To understand this type of loan better, let’s visualize the case of Shyam. Shyam has set aside some money in a five-year fixed deposit scheme. Thanks to the great interest rate, Shyam’s fixed deposit corpus will be ₹3 lakhs by the end of five years, although his initial investment was much lower. The bank has been regularly paying him a 5% interest each year. So that’s ₹15,000 flowing into his savings bank account annually. But one day, Shyam needs ₹1 lakh to meet a financial emergency.
Should he withdraw his fixed deposit or take a personal loan?
By taking a loan, Shyam may fall into the vicious cycle of never-ending EMIs. The interest rate on personal loans and even credit cards can be as high as 18-30%! And if he breaks the fixed deposit, he will lose out on the annual interest. So now you see why loans against FDs work? In this case, the best option for Shyam would be to approach his bank and seek a loan against his FD. By doing so, not only is Shyam getting a loan at a relatively low interest rate, his fixed deposit interest is protected.
Who can apply for a loan against FD?
Individuals with a fixed deposit account with a bank or financial institution can apply for a loan against it. The applicant must, of course, be a resident of India and should be above the age of 18 years. In some cases, joint account holders of a fixed deposit account may also be eligible.
Benefits of loans against FD
Using your fixed deposit as collateral can offer significant advantages. To begin with, such loans generally have lower interest rates than non-collateralized bank loans. Banks are generally quick to process such loans as there will be no credit verification process.
For borrowers, the prepayment of such loans makes them easy to handle. Several banks even have a zero-prepayment schedule. The icing on the cake is the interest on the fixed deposit, assuming the borrower honors the loan.
Loan amount up to 70% to 90%
Usually, financial institutions do not lend 100% of the value of a fixed deposit. Simply put, one cannot borrow a loan of ₹1,00,000 on a fixed deposit of ₹1,00,000. While the norm in the banking industry is 70%, some institutions may offer more. A 70% valuation means a borrower can take a loan of ₹70,000 on a fixed deposit of ₹1,00,000.
Low interest rates
Loans against FD typically offer lower interest rates compared to other types. This is because the fixed deposit account serves as collateral for the loan.
Flexible payment procedure
Banks offer various flexible payment procedures for loans against FDs, such as:
- They Equated Monthly Installments (EMIs), where the borrower has only to repay a fixed amount every month.
- Bullet repayment, where the entire loan amount and interest are repaid at the end.
- Overdraft facility, where the borrower can withdraw any amount up to an approved limit and pay interest only on the amount used.
Zero processing fee
Loans against FDs also have a zero processing fee. This is again because the bank already has the fixed deposit account as collateral for the loan. When such collateral is available, the bank does not incur additional costs to evaluate the borrower’s creditworthiness.
Hassle-free application process
Several banks offer a two-minute process for loan applications against an existing fixed deposit. Your bank’s smartphone app can likely be used to apply for a loan against your FD. Even if you call or visit your bank, you will be surprised at the quickness and smoothness of the process.
No requirement to break the fixed deposit
A premature withdrawal may seem like the only option during a financial emergency. However, as we have seen, that’s not true because a loan against a fixed deposit lets you continue the fixed deposit while giving you access to liquid funds.
Helps maintain liquidity
A loan against FD helps you maintain liquidity. That means you can break the FD when you want to.
Credit checks aren’t necessary
Since the FD acts as collateral, there is no need for a credit check, and even those with a poor credit history can avail of this loan.
Whether your bank is nationalized, a public sector undertaking, or even a cooperative bank, obtaining a loan against a fixed deposit is likely easy. Moreover, taking such a loan is considered way safer than other options. From the bank’s perspective, the FD offers a form of security, while for borrowers, it is a quick and easy way to find funds during an emergency. However, always have a plan in place for loan repayment.
Learn more about the perks of FDs here.
What are fixed deposits and how can they be used as collateral for loans?
Fixed deposits, also known as term deposits or time deposits, are investment instruments where you deposit a fixed amount of money for a specified period at a predetermined interest rate. They can be used as collateral for loans by pledging the fixed deposit amount to secure the loan, reducing the lender’s risk and potentially allowing for lower interest rates on the loan.
Can I use fixed deposits from any bank as collateral for loans?
The eligibility of using fixed deposits from any bank as collateral for loans depends on the policies of the lending institution. Some lenders may accept fixed deposits from specific banks or have a list of approved banks for collateral purposes. It’s important to check with the specific lender regarding their requirements and guidelines for accepting fixed deposits as collateral.
Are there any risks involved in using fixed deposits as collateral?
Risks of using fixed deposits as collateral include default risk, reduced liquidity, potential loss of interest, and value fluctuations affecting the collateral’s value.
Are there any alternative options to using fixed deposits as collateral for loans?
Yes, besides fixed deposits, alternative options for collateral include real estate, stocks, bonds, mutual funds, gold, vehicles, and other valuable assets, depending on the lender’s policies.
How does the process of using fixed deposits as collateral for loans work?
When using fixed deposits as collateral for loans, the borrower pledges their fixed deposit account to the lender. The lender holds a lien on the deposit, providing security for the loan. If the borrower defaults, the lender can liquidate the fixed deposit to recover the outstanding amount.