Fixed Deposits (FDs) have historically always been the first choice for those looking to grow savings in a relatively safe way. However, life has a way of not respecting maturity dates. Whether it is an unexpected medical bill, a child’s education, or an unexpected opportunity to contribute to a business, there are times when it is important to have liquidity.
Instead of breaking your FD and losing the interest you’ve accrued, there’s a more efficient option, i.e., taking a Loan against it. Let’s unpack how this works and why it might just be one of the smarter borrowing tools available today.
What Exactly is a Loan against an FD?
In short, a Loan against FD is a secured Loan wherein your Fixed Deposit is kept as security. As the lender already possesses your FD, the procedure is usually quicker, with less paperwork and less interest than Unsecured Loans. Here is how you can borrow:
- Loan-to-value Ratio: You may largely borrow 70% to 90% of your FD amount. It will also be based on the lender’s policy and the type of Deposit.
- Loan Tenure: The Loan duration will be linked to your FD maturity. You can’t borrow beyond that date.
- Interest Rates: These are usually just a notch above the FD’s interest rate, which is typically around 0.5% to 2% more. So, the cost of borrowing remains relatively low.
How do you apply?
Here is how you can apply for an FD:
- Step 1: Ensure you have the requisite eligible FD (most FDs are eligible except tax-saving ones).
- Step 2: Gather important documents like proof of identity, proof of address, the FD receipt and a cancelled cheque.
- Step 3: Go to your Bank branch or apply via their portal.
- Step 4: Once your Loan is approved, the money is disbursed directly into your Account, sometimes within a few hours.
Some Lenders will also provide the facility as an overdraft rather than a standard Loan, and you will only pay interest on the money you have actually used.
Why Choose a Loan Over Breaking the FD?
Here’s why it’s worth considering the Loan route:
- Preserves Interest: Your FD continues earning returns, uninterrupted.
- No Penalties: Premature withdrawals attract penalties and reduced interest. Loans sidestep this altogether.
- No Credit Score Fuss: Since the FD is collateral, lenders usually don’t require a high credit score.
- Boosts Credit Profile: Timely repayments of the Loan could help to improve your credit profile.
Things to Take into Account
This is a convenient way to obtain funds; however, you need to be informed about certain risks. Some of the things to consider are:
- Lien on FD: Your FD will be locked until the Loan is repaid in full.
- Default Consequences: Miss a payment, and the bank may liquidate your FD to recover the dues.
- Interest Mechanics: Some lenders will charge interest on the full amount of the Loan and not on a reducing balance.
- Reduced Liquidity: You will not be able to access the pledged FD nor break it while the Loan is open, so plan accordingly.
How to Find the Right Lender?
Not all institutions offer the same terms when it comes to a Loan against property or an FD. Before jumping in, weigh:
- Interest Rate and Processing Fees: A lower interest rate may not be as good as it seems when extra fees are included in the final cost.
- Loan Amount Eligibility: Each lender has different terms. Some lenders offer better Loan-to-value ratios.
- Repayment Terms: Some lenders offer the option of flexible EMIs or overdraft facilities, so make sure the lender suits your cash flow.
- Service Track Record: The speed of response and overall service provided by lenders could be quite different. Hence, read reviews or speak to someone who has borrowed from the lender.
Is it Better than Other Secured Loans?
You should also note that property secured lending has significantly larger limits, longer Loan terms, more documents, and property valuation. A Loan against an FD is quicker to put in place as it is more suitable for short-term urgent needs.
Likewise, some business owners or salaried professionals might explore lease rental discounting, which allows them to borrow against rental income. Additionally, while the amounts available might be higher in that case, the process may take time and get complex.
Final Thoughts
If you are looking for short-term funds and do not want to compromise on your long-term savings goals, then borrowing against your FD could be a great option. This allows you to get financing while your money is still compounding without use. As always, make sure you do your diligence, i.e., read the fine print, ask about fees, and only take what you need.