If you can demonstrate that you will repay the loan with interest on time and have a solid credit score, you have many options for taking out loans. Lenders feel confident lending to you because of your financial history. Sometimes, when you think you have no more collateral to offer, your investment comes to your aid.
People frequently don’t know where to turn for help when they have unexpected emergencies that can seriously impair their finances. However, with so many retail credit products readily available, accessing funds in an emergency has become much easier today.
Let’s examine one such offering, the loan secured by fixed deposits (FD).
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What is Loan against FD?
A secured loan that an FD holder can obtain by using their fixed deposits as collateral is called a loan against fixed deposits, or loan against FD. These loans are readily available at the majority of banks and financial institutions that offer FDs, and they have grown in popularity as a means of obtaining credit in the modern era. This pattern is reflected in “MoneyMood,” an annual report on credit trends released by BankBazaar. It shows that loans against FDs have increased by 16.47% year over year, from Rs 97.5 crore in 2022 to Rs 113.9 crore in 2023.
Let’s review some of the fundamental characteristics of a loan against FDs so you can better understand the offering and determine if it meets your needs.
Interest rate
Interest rates have a big impact on your borrowing capacity. Lenders typically charge interest rates for loans against FDs that are between 0.75% and 2% higher than the current FD interest rate. This is so that the lender can offer a lower interest rate since the FD acts as collateral, reducing their risk. This rate may often be less than that of unsecured loans, like personal loans, which normally have interest rates of 10% and higher. Furthermore, the borrower is spared the interest rate swings that are generally connected to some secured loans because the interest rate is fixed.
Loan amount
Typically, this kind of loan has a maximum loan amount that is 85% of the deposit amount and higher. To offer the loan against deposit facility, some lenders, however, might have a minimum deposit requirement.
Processing and documentation of loans
Loans secured by FDs also have a fast processing and approval time, just like fixed deposits. This is so that there is no need for a thorough investigation of the borrower’s financial background because the FD, which is the security for the loan, acts as collateral. As a result, not much paperwork is needed to complete the loan processing.
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Collateral and guarantor
The borrower is still the owner of the FD used as collateral in a loan secured by it. The loan process is streamlined and expedited because the borrower does not require a second guarantor because the loan is secured by the FD. Throughout the term of the loan, the FD accrues interest at the predetermined rate, which the borrower may use to settle any unpaid interest.
Duration of repayment and upfront payments
Loans secured by FDs typically have flexible repayment terms, and borrowers can choose to pay in Equated Monthly Instalments (EMIs). But before the FD matures, the repayment needs to be completed. Because of this, the loan repayment period is fixed, giving the borrower financial flexibility. Furthermore, a lot of lenders might not apply prepayment penalties—which are typically applied to other kinds of loans—to this kind of loan.
Eligibility
To apply for this kind of loan, you must, at minimum, be a bank or financial institution customer with an FD account. Applications for this loan are accepted from resident Indian citizens, family trusts, Hindu Undivided Families (HUF), clubs, societies, associations, sole proprietorships, group companies, and partnership firms.
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The benefits offered by loans against deposit are plenty, but like any other loan, you must exercise caution when applying. First and foremost, assess your requirements and finalise the loan amount you need. Ensure timely repayments on your loan to avoid an adverse impact on your credit score. Lastly, carefully review the terms and conditions, especially the interest rate, repayment options and prepayment clause, before committing to it.
These pointers will assist you in making an informed choice when looking to borrow against your fixed deposit investments.
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