Fixed deposits have been the go-to investment option for generations of Indians. Despite the recent emergence of other investment instruments, FD remains a top choice among 18% of the Indian investor portfolios.
Besides offering fixed returns over a pre-determined tenure, a fixed deposit can also be used as collateral for loans.
Our FD deposits remain locked for a fixed period. However, in times of emergency, we can liquidate the deposit by withdrawing prematurely or pledging the deposit to secure loans.
In other words, a loan against fixed deposit is a secured loan where the lender uses our FD account as collateral to disburse the loan amount.
The amount varies from one bank to the other. Mostly, we can avail of loans up to 95% of our FD value. The interest rate is typically 2 to 3% higher than the FD interest rate, making it more lucrative than unsecured loans.
Eligibility Criteria for Loans Against Fixed Deposit
The following categories of depositors can avail of a loan against a fixed deposit:
- Resident Indians.
- Hindu Undivided Family (HUFs).
- Family Trusts.
- Sole proprietorships, partnership firms, and companies, including group companies.
- Clubs, groups, and societies.
Features of a Loan Against Fixed Deposit
- The interest rate of a loan against a fixed deposit is lower than the interest rates of personal loans, which can go up to 21%.
- The documentation required is minimal since the lender already has the updated KYC details from when the FD account was opened. That being said, the following documents are typically required:
- A duly-filled application form.
- Fixed deposit receipts duly discharged in the lender’s favour.
- Banks charge interest on the withdrawn amount while the remaining deposit continues to accrue interest.
- A borrower can avail of a loan up to 95% of their deposit value. However, this percentage varies from one bank to the other.
- The credit or CIBIL score is rarely considered when disbursing a loan against a fixed deposit. Hence, one can apply for a loan even with a low credit score.
- Usually, no prepayment charges are involved. So we can repay the loan before the tenure ends without attracting penalties.
- The loan term is the same as the tenure of our FD account.
- Borrowers must deposit the original deposit certificates with the bank for the entire loan period.
- Loans can also be taken against deposits held by all family members, except minors.
- Mostly, banks offer loans on deposits free from lien or restraint.
Details of a Loan against Fixed Deposit Provided by Different Banks
|Name of the Bank||Interest Rate||Minimum Limit||Loan as a % of Deposit|
|Axis Bank||2% above the fixed deposit rate.||Rs 25,000.||Up to 85% of the deposit value.|
|State Bank of India||1% above the fixed deposit rate.||Rs 5,000.||Up to 95% of the deposit value.|
|HDFC Bank||2% above the fixed deposit rate.||Rs. 25,000.||Up to 90% of the deposit value.|
|Federal Bank||2% above the fixed deposit rate.||Rs. 5000||Up to 90% of the deposit value.|
|Deutsche Bank||2% above the fixed deposit rate.||Rs 25,000.||Up to 95% of the deposit value.|
Benefits of a Loan Against Fixed Deposit
- The interest rate on loans against a fixed deposit is comparatively lower than the interest rate typically charged on unsecured personal loans.
- There are zero processing and prepayment fees.
- Minimal documentation is required. Since the bank had already obtained our KYC details when opening the FD account, extra details are not required while applying for a loan.
- The loans can be applied online, thus allowing us to avoid long queues.
- A loan against FD is an excellent way to meet our liquidity needs without breaking the fixed deposit.
- The bank will charge interest on the amount drawn by us and not the entire amount.
- Loans can be taken against fixed deposits held by one individual or by joint holders.
- Since credit score is not considered, even those without a low credit rating can apply for a loan.
Documents Required to Secure a Loan against a Fixed Deposit
- A duly filled loan application form.
- Receipt of the fixed deposit.
- An ECS mandate for a non-cumulative deposit for transfer of the deposit interest.
- A cancelled cheque.
How to Apply for a Loan Against a Fixed Deposit Online?
- Log in to the online site of the bank where our fixed deposit is being held.
- Go to the fixed deposit section and select the overdraft against loan option.
- Fill in all the relevant details such as the loan amount, the loan tenure etc.
- The bank will provide notification by email and SMS when the loan is approved against the lien of our fixed deposit.
- Post-approval, the amount will be credited to our bank account.
Deposits constitute a key part of our overall portfolio; they are an investment asset. Besides allowing us to build a corpus, fixed deposits also act as collateral for a loan/overdraft.
In times of need when we require access to liquidity, a loan against a fixed deposit can be an excellent option. We get to liquidity our funds. At the same time, we also accrue interest on the deposit amount. When the loan is repaid, the deposit is returned to us, with its value intact.
- What happens if we are unable to repay our loan against a fixed deposit?
If we are unable to repay the loan, the bank will use our fixed deposit pledged to the bank for the loan towards the payment of our loan against FD.
- Is it possible for me to close my fixed deposit with the bank before the loan payments are complete?
Since the fixed deposit account is pledged to the bank, we cannot close it before the loan term ends. We can close the account only when the loan is repaid.
- Can I get a loan equivalent to my entire FD value?
No, banks typically allow borrowers to avail of loans up to 95% of their FD value. However, this percentage differs from one organisation to the other.
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