Loan Against Fixed Deposit: How It Works

Are you looking for a quick and hassle-free way to access funds? A loan against fixed deposit could be the perfect solution. This type of loan allows you to borrow money using your fixed deposit as collateral, providing a convenient way to meet your financial needs without breaking your FD. Let's explore how an FD loan works and its key benefits.

What is a Loan Against Fixed Deposit?

A loan against fixed deposit, also known as an FD loan, is a secured loan that allows you to borrow an amount against your deposit. The amount disbursed is typically a percentage of the actual deposit amount, which could be up to 90% of the deposit value (kindly check with your bank for better clarity). 

A certain interest rate is levied on the borrowed amount, which you can repay before the maturity period. Unlike most personal loans, there's no prepayment penalty on early closure of FD loan. The primary benefit of loan against FD is that you can access funds during financial emergencies without liquidating your account.

How Does an FD Loan Work?

When you apply for a loan against your fixed deposit, the process is straightforward:

1. Collateral 

Your fixed deposit acts as security for the loan.

2. Loan amount: 

You can typically borrow up to 90% of your FD value. This may vary across banks.

3. Interest rate: 

The interest rate on an FD loan is usually 1-2% higher than your FD interest rate.

4. Repayment: 

The repayment period is same as your FD maturity period. You can pay off the loan anytime you wish before the maturity period ends.

5. FD Continues :

Your Fixed Deposit remains active, continuing to earn interest.

Benefits of Taking a Loan Against Fixed Deposit

1. Quick approval: 

Since your FD serves as collateral, the loan approval process is fast and simple.

2. Lower interest rates: 

Just like secured loans, FD loans come with lower interest rates compared to unsecured loans like personal loans. This significantly lowers your EMI obligations.

3. Minimal Documentation: 

You can apply for a loan against FD only with a bank where you have an FD account. The concerned bank already has your information, so the overall documentation and application process is quite simple and straightforward. You still may have to submit your FD receipt and KYC documents. Check with your bank for better clarity.

4. Flexible Repayment; No EMIs 

As the loans are disbursed as an overdraft, it's not necessary to repay the loan in EMIs. The loan tenure is the same as your FD maturity period. You can always repay it whenever funds are available. However, ensure to repay the loan before your FD maturity ends. In case you fail to do so, the amount withstanding would be adjusted against your FD proceedings. 

5. Continued FD benefits: 

The most important benefit is you don't have to withdraw your deposit. Your FD account remains as it is.

6. No prepayment charges: 

Banks don't levy any penalty charge for FD loan foreclosure. You can prepay and close the loan whenever you wish. 

7. No Credit Score Checks:

Banks don't check your credit score to approve such loans. This may benefit customers with low credit scores seeking quick access to funds.

When Should You Consider Taking a Loan Against FD 

Loan against FD could be an excellent option for those looking for loans at lower interest rates. It is much easier to get a loan against FD from banks. Unlike personal loans, banks don't check your repayment capacity, credit score, and monthly income while processing FD loans. The paperwork involved is minimal. Also, it could serve as a great cost-effective alternative for customers with low/poor credit scores.

Okay, But What About Overdraft Against FD? 

Overdraft (OD) against FD works similar to Loan Against FD, just that the interest is charged only on the withdrawn amount. For instance, let's say your overdraft limit is 80% and you have an FD of ₹1 lakh. But, you have borrowed only ₹50,000 (50% of your overdraft limit). 

The interest will be charged only on ₹50,000. Banks usually cap the overdraft limit ranging between 70% to 90%. However, you may need to meet minimum FD amount and tenure requirement to avail this benefit. Check with your bank for better clarity.

Things to Keep in Mind Before Availing Loan Against Fixed Deposit 

1. Loan tenure: 

The loan tenure cannot exceed the remaining tenure of your fixed deposit.

2. Interest calculation: 

Interest is typically charged on the entire loan amount, not the reducing balance.

3. FD liquidation: 

If you default on the loan, the bank may liquidate your fixed deposit to recover the dues.

4. Credit score impact: 

Timely repayment of your FD loan can positively impact your credit score.