How To Leverage Your Fixed Deposit With A Loan Against FD

During financial emergencies, many people often find themselves in need of immediate funds. While personal loans are a common option, a loan against a fixed deposit (FD) can offer several advantages. You can borrow up to 90% of your FD amount. Moreover, the attractive interest rate for loan against fixed deposits makes it an appealing choice. The loan tenure is also aligned with the maturity period of your FD, providing flexibility and convenience.

This article explores how a loan against fixed deposit works, eligibility criteria, loan limits offered by various banks, benefits of loan against FD and drawbacks. 

How does a loan against a fixed deposit work?

A loan against a fixed deposit functions similarly to any other loan. The borrower receives a lump sum amount which is then repaid through equal monthly instalments (EMIs). 

However, unlike unsecured personal loans, this type of loan is secured by pledging your fixed deposit as collateral. The Loan-to-Value (LTV) ratio comes into play here, allowing you to calculate the percentage of money you can avail against your investment.

For instance, most banks offer an LTV ratio ranging between 90% and 95% of the deposit amount. This means that if you have an FD worth ₹1 lakh, you can potentially borrow up to ₹95,000 against it. This is one of the best FD benefits.

Eligibility criteria

The benefits of loan against FD can be enjoyed by all existing fixed deposit holders such as individual holders, joint account holders, family trusts, clubs, associations, societies, sole proprietorships, partnership firms, group companies, and Hindu Undivided Families (HUFs). The eligibility criteria are relatively simple and accessible to a wide range of individuals and entities.

It is to be noted that different banks offer varying loan limits and interest rates for loans against fixed deposits. 

Advantages of a loan against fixed deposit

Taking a loan against fixed deposit offers several benefits:

1. Lower interest rate for loan against fixed deposit: This type of loan generally comes with a lower interest rate compared to unsecured personal loans.
2. Minimal processing fee: Most banks do not impose any processing fee for loans against fixed deposits. Even if there is a fee, it is usually lower than that for other types of loans.
3. Quick processing and minimal documentation: Loans against fixed deposits are processed quickly with minimal documentation requirements.
4. No credit history check: Since the fixed deposit serves as collateral, the lender does not perform a credit history check. This makes it an attractive option for individuals with a low credit score.
5. Retain FD benefits: By taking a loan against fixed deposit, you can continue to earn interest on FD while availing the required funds.

Disadvantages of a loan against fixed deposit

While there are several advantages, it is important to consider the drawbacks as well:

1. Risk of foreclosure: If you fail to repay the loan, the bank has the right to foreclose on your fixed deposit to recover the loan amount.
2. Loan tenure limitations: The tenure of the loan cannot exceed the remaining term of your fixed deposit.
3. Impact on credit score: Defaulting on a loan availed against a fixed deposit can negatively impact your credit score.

Conclusion

Availing a loan against fixed deposit provides quick and easy access to funds without breaking your savings prematurely. The lower interest rates, minimal processing fees, and flexibility make it an attractive financial option for individuals facing cash crunch situations or seeking financial assistance.If you need funds, explore a loan against FD. Capitalise on your existing fixed deposits with Mahindra Finance's unique FD benefits. Mahindra Finance offers this convenient facility, accompanied by personalised services tailored to meet your specific needs.

FAQs

Q1. How does a loan against a fixed deposit work?

When taking a loan against a fixed deposit, the banks keep the customer's FD as the collateral. This makes the loan secure. Since it's a secured loan, the interest charged for it is cut short.

Q2. Is OD against FD a good option?

ODs provide immediate access to funds, up to 90% of the FD value. This is helpful for businesses that need funds at short notice. ODs usually have no processing fees and prepayment charges, making them cost-effective.

Q3. What happens if a loan against FD is not paid?

When a loan against an FD is not paid, the bank forecloses the fixed deposit to recover the loan. 

Q4. What is the benefit of taking a loan on FD?

A loan against an FD means you can borrow money up to a certain limit without breaking your FD.