How Fixed Deposits Work as Collateral for Loans

Have you ever considered tapping into your Fixed Deposit when faced with financial needs? We are not talking about liquidating your FD, but using your FD as collateral to take loan or overdraft facility. This can be a smart financial move, especially in times when you need funds but don't want to disrupt your FD investments. 

In this blog, we will uncover how you can use your FD collateral for loans – an underutilised strategy that offers both security and liquidity.

What is FD Collateral? 

FD collateral basically means using your Fixed Deposit as a security against loan. If you face unexpected expenses or opportunities where you need funds, you don't have to withdraw your fixed deposit. Instead, you can borrow against it, ensuring that your FD investment continues to earn interest.

Benefits of Using FD as Collateral 

1. Quick Loan Approval: Since it's a secured loan, the approval and disbursal process is faster compared to other loans.

2. Attractive Interest Rates: Loans against FDs generally carry lower interest rates compared to unsecured loans. The interest rate is generally 1% - 2% higher compared to your prevailing FD rates.

3. Continue Earning Interest on Deposit: Your FD keeps earning interest on deposit.

4. Flexible Repayment Options: You can repay the loan anytime before your FD maturity. There's no monthly fixed amount repayment mandate. 

5. No Credit Score Check; Minimal Documentation: Since you already have an FD with the bank, all your basic details is recorded with the bank. You don't need to furnish additional documents except your basic KYC documents and FD receipt to avail the loan/overdraft.

Sample Calculation 

Let’s say you have an FD worth ₹2 lakh at an interest rate of 6% per annum. If you take a loan against 90% of this value (₹1.8 lakh), here’s what happens:

• Your ₹2 lakh continues to earn interest.
• You get immediate access to ₹1.8 lakh for your needs.

FD as a Collateral: Eligibility and Process 

Who Can Apply?
 

Individuals, joint account holders, societies, trusts who have an existing FD with the bank.

Steps to Secure FD Loan 

1. Application Submission: Provide necessary documents like ID proof and Fixed Deposit receipts.

2. Bank Verification: The bank verifies your documents along with your fixed deposit details.

3. Loan Disbursement: Upon approval, funds are made available for use based on the predetermined percentage of your FD.

When Should You Consider This Option? 

1. Sudden large expenses: Such as medical emergencies or urgent home repairs.

2. Business needs: For quick cash flow solutions.

3. Education: To fund higher education expenses without disrupting long-term savings.

For instance, if Asha needs ₹3 lakh for her MBA tuition fees but doesn’t want to liquidate her growing investments, she might consider taking a loan against her fixed deposit instead of withdrawing it entirely.