How To Leverage Your Fixed Deposit with A Loan Against FD

During financial emergencies, many people look for immediate sources of funds. While personal loans are a common option, a loan against FD can be a smarter and more cost-effective solution.

It allows you to borrow funds while continuing to earn interest on your fixed deposit. This blog will explore how a loan against fixed deposit works, eligibility criteria, benefits, drawbacks, and important considerations to keep in mind.

How Does a Loan Against Fixed Deposit Work?

A loan on FD works like any other loan, where the borrower receives a lump sum amount and repays it in equal monthly instalments (EMIs). However, as opposed to unsecured personal loans, this loan is secured against your fixed deposit, which acts as collateral.

One of the key factors to consider is the Loan-to-Value (LTV) ratio. This ratio determines the percentage of the fixed deposit amount that can be borrowed. Generally, lenders provide an LTV ratio which is 90% to 95% of the deposit amount. For example, if your FD's worth is ₹1 lakh, you can borrow up to ₹95,000 against it.

The tenure of the loan is linked to the maturity period of the fixed deposit, ensuring that the loan is repaid within a suitable timeframe. That makes it a flexible option for those who need funds without breaking their savings.

Eligibility Criteria for a Loan Against Fixed Deposit

The eligibility criteria for availing a loan against fixed deposit are straightforward and accessible to a wide range of individuals and entities. The following are eligible to apply:

1. Individual FD holders (single or joint account holders)
2. Sole proprietorships and partnership firms
3. Hindu Undivided Families (HUFs)
4. Family trusts, clubs, associations, and societies
5. Group companies and other business entities

Since the fixed deposit is collateral, lenders typically do not require a credit history check, making it an attractive option for those with a low credit score.

Advantages of a Loan Against Fixed Deposit

Taking a loan against FD offers several benefits that make it a preferable choice over traditional personal loans. Some of the key advantages include:

1. Lower Interest Rates

A loan against fixed deposit usually comes with lower interest rates than unsecured personal loans. That is because the lender has the security of your FD, reducing their risk.

2. Minimal Processing Fees

Most lenders do not impose high processing fees for loans against FDs. In some cases, the fees may be waived entirely, making this an economical borrowing option.

3. Quick Processing and Minimal Documentation

Since the fixed deposit is already with the lender, the loan approval process is quick and requires minimal documentation. This allows borrowers to access funds swiftly in times of need.

4. No Impact on FD Benefits

One of the major benefits of a loan on FD is that you can continue to earn interest on your fixed deposit while using the borrowed funds. This ensures that your savings keep growing even while you meet immediate financial needs.

5. No Credit Score Check

Unlike personal loans, where creditworthiness is a major factor, a loan against fixed deposit does not require a credit check. This makes it an ideal solution for those with a low or limited credit history.

6. Flexible Repayment Options

Borrowers can choose flexible repayment tenures aligned with their FD maturity, making it easier to manage their finances without unnecessary stress.

Disadvantages of a Loan Against Fixed Deposit

While a loan against FD has several advantages, it is important to be aware of the potential drawbacks before applying:

1. Risk of Foreclosure

If you fail to repay the loan, the lender has the right to foreclose on your fixed deposit to recover the outstanding amount. That means you could lose your savings if you're unable to meet repayment obligations.

2. Limited Loan Tenure

The tenure of the loan cannot exceed the remaining term of your fixed deposit. If your FD is set to mature soon, the repayment period may be shorter, leading to higher EMIs.

3. Impact on Credit Score

Defaulting on the loan can negatively impact your credit score, making it difficult to secure loans in the future. It is important to ensure timely repayments to avoid this issue.

How to Apply for a Loan Against Fixed Deposit

Applying for a loan on FD is a simple process. Here are the general steps involved:

1. Check Eligibility: Ensure you meet the lender's eligibility criteria.
2. Submit Application: Fill out the application form and submit the required documents.
3. Loan Approval: Once the application is processed, the lender will approve the loan based on the LTV ratio.
4. Loan Disbursement: The funds are disbursed to your account, and you can start using them immediately.
5. Repayment: Make monthly EMIs as per the agreed terms to avoid any penalties.

When Should You Consider a Loan Against Fixed Deposit?

A loan against FD is an excellent choice in the following situations:

1. When you need urgent funds without breaking your savings
2. If you want a lower interest rate compared to a personal loan
3. When you have a low credit score and need financial assistance
4. If you require flexible repayment options aligned with your FD maturity

Conclusion

A loan against fixed deposit is a convenient and cost-effective way to meet immediate financial needs while retaining the benefits of your savings.

With lower interest rates, minimal documentation, and flexible repayment options, it serves as a great alternative to unsecured loans.

However, it is crucial to carefully assess your repayment capability before opting for a loan on FD to avoid the risk of foreclosure and credit score damage.