What is Loan Against FD (Fixed Deposit)? Features & How it works?

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In case of any cash requirement, Opting for Loan against FD (Fixed Deposit) from banks, is a time efficient way of getting short-term loans. You can opt for it without liquidating your fixed deposit. This . Lets discuss the features and benefits of loan against FD in this article.

Feature & Benefits of Loan Against FD

Introduction

In case of any cash requirement, Opting for Loan against FD (Fixed Deposit) from banks, is a time efficient way of getting short-term loans. You can opt for it without liquidating your fixed deposit. This . Lets discuss the features and benefits of loan against FD in this article.

Financial Planning Knowledge Bank by Invest Yadnya
Financial Planning Knowledge Bank by Invest Yadnya

Loan Against FD (Fixed Deposit)

What is Loan Against FD?

  • During financial emergencies, some investors may consider liquidating their FD investments before maturity.
    • Liquidating your Fixed Deposit (FD) in case of cash requirement is not a profitable decision because if you do so, you lose out on the interest and also end up paying a penalty amount.
    • Once the FD is liquidated, the bank pays interest at a rate that is lower among the rates at which the FD was approved and the rate of interest on the day of liquidation.
    • However, you can tend to emergencies without breaking your FD, by taking a loan against fixed deposit. This is a good option as it ensures that the benefits you derive from the Fixed Deposit account stay intact, and offers the loan at a comparatively lower rate of interest.
  • Loan against FD (Fixed Deposit) is a type of secured loan where customers can pledge their fixed deposit as security and get loan in return.
  • These loans are usually given in the form of an Overdrafts or Demand Loan.
  • Loan Amount : The amount of loan depends on the FD deposit amount. Overdraft limit backed by fixed deposit is lower than the deposit amount. You can avail up to 85-95% of the value of your fixed deposit.
  • Interest Charged : Interest charged on loan is higher than the applicable FD interest rate (Banks and NBFCs usually charge 0.5% to 2% interest rate above the applicable FD interest rates)
  • Thus, you can opt for loan against FD without losing out on the interest and paying a penalty for breaking the fixed deposit.

Eligibility

  1. Loan against fixed deposits is extended to all the fixed deposit holders, be it individual holder or those with joint accounts
  2. FD in the name of a minor does not qualify for this facility
  3. Investors in 5 year tax saving FDs cannot apply for this type of loan

Features & Benefits of Loan Against FD

Loan Against Fixed Deposit
Loan Against Fixed Deposit
1. Lower Interest Rates

Your fixed deposit acts as a security for a loan, so the interest rate charged on these loans are lower. The interest rates on these loans are usually lower than the interest rates on personal loans by about 2% to 2.5%. Hence, the Equated Monthly Installments (EMIs) on these loans are also lower.

2. No Processing Fees

Banks charge a percentage of the loan amount as the processing fees for sanctioning the loan. But most banks do not charge this processing fees for overdraft against fixed deposits.

3. No Need to Break FD

When you liquidate FD in case of any short-term cash requirement, you lose out on the interest and also end up paying a penalty amount. Thus, opting for Loan against FD avoid this type of losses since you don’t need to break your FD.

4. Minimal Paperwork

Banks already have your details which you furnished during the opening of your FD, the documentation required for availing the loan against your FD will be minimal. You will not be required to submit documents such as your proof of income, Income Tax Returns (ITR) etc.

5. No Credit Score Check

When you apply for any kind of loan, lenders will have a look at your credit score before they offer you a loan. However, in the case of a loan against FD, your CIBIL or credit score will not be considered while evaluating your eligibility. Hence, such loans can be a good option for people who have low or no credit score.

6. No Prepayment Fee

When you prepay any loan, the banks lose out on the interest and hence, they will charge you a penalty for the same. However, in the case of a loan against FD, no penalty is charged as banks do not lose out on the interest amount. Instead, they profit from it as they do not have to pay you any interest on the loan amount.

Loan Against FD Offered by Various Banks

Major Banks Offering Loan Against Fixed Deposit Facility
Major Banks Offering Loan Against Fixed Deposit Facility

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