In the world of personal finance, there are various strategies and options available if you want to make your money work for you. One such option is the concept of a loan against Fixed Deposit (FD)! It can be an effective financial tool when used strategically.
A loan on fixed deposit allows you to access money without prematurely removing them. Instead of breaking the fixed deposit, you might get a loan from the same bank where it is housed.
This comprehensive guide delves into the details of what a loan on FD entails, how it works, and the potential benefits and considerations associated with it. You are going to get some valuable insights into optimizing your financial resources. So, let's embark on this informative journey!
What is a Loan Against FD?
A loan against a fixed deposit is a type of secured loan in which you use your fixed deposit as security to get a loan. The value of the FD determines the loan amount. Typically, you may borrow between 80 and 90% of its value. However, the amount may vary per bank.
The FD loan allows you to access cash quickly and easily while collecting interest on your fixed deposit.
What Are the Criteria to Get a Loan Against Your FD?
One of the most basic requirements required to apply for a loan on a fixed deposit is to have a fixed deposit account with the bank or financial institution from which you want to get a loan against your FD. Apart from this, here are the other requirements to apply for a loan against your FD:
You should have Indian citizenship: Individuals residing in the country and aged 18 or older are eligible to apply for a loan secured by a fixed deposit.
- Associations, societies, and clubs can apply for it.
- You can apply if you are a business with a sole proprietorship, partnership, or group company.
- Even family trusts can apply for a loan on a fixed deposit.
- HUFs are also eligible to secure a loan against a fixed deposit.
While the above criteria are for who can apply for a loan against FD, below are the criteria that can make you ineligible to apply for the same. Note that these may vary depending on different financial institutions:
- If your FD is under a minor’s name: Loans cannot be obtained using fixed deposits held in the name of a minor.
- If you own a five-year tax-saving FD account.
- If you own both joint and individual fixed deposit accounts.
- Fixed deposits under an attachment or garnishee notice are ineligible as collateral for loans.
- Fixed deposits with a lien for other loans cannot be used to secure a new loan.
- A court order permits a creditor to collect a debt directly from a third party indebted to the debtor.
- A legal claim on an asset, like a fixed deposit, prevents its use as collateral for another loan or obligation.
Who Can Apply for a Loan Against an FD?
It is pretty simple – If you own a fixed deposit, whether individually or jointly, you can request a loan against it. However, one question that often comes up is – “can we take a loan against tax saver FD?” As a matter of fact, those who own FDs in the name of children or who have 5-year tax-saving FDs are not eligible for this service.
Why Take a Loan on FD?
It’s a smart financial move to opt for an FD loan instead of using other forms of credit, such as personal loans or credit cards. Why? Well, the FD loan interest rate is much lower, there’s minimal documentation involved, and you are not charged with any processing fee. Isn’t it a win-win?
There are many more perks of this wonderful banking facility, which are mentioned in detail in the upcoming sections of this blog. Stay tuned!
What are the Documents Required to Get a Loan Against a Fixed Deposit?
When applying for a loan against a fixed deposit, the documentation required may vary by bank. Generally, you must provide a signed application form for the loan against a fixed deposit, an FD receipt discharged in favour of the lender, and standing instructions to the bank, if applicable.
Although some banks may want extra documentation, it is suggested that you check with the bank where your fixed deposit is maintained to determine their exact criteria for receiving such a loan.
What are the 7 Major Benefits of Getting a Loan Against Fixed Deposit?
This financial manoeuvre has various advantages that make it an appealing option to arrange some funds without disrupting your savings. Let's go over the 7 benefits of getting a loan against an FD in detail.
1. Simplified Approval Procedure:
Obtaining a loan against an FD offers a significant advantage in terms of the approval procedure. Because the fixed deposit acts as collateral, the approval process is often faster and easier than traditional loans. So you can get the money you need without going through a lengthy approval process.
2. No Credit Check:
Fixed deposit loans do not require a credit check. If you have a less-than-perfect credit rating, you can benefit the most from this. You can still obtain the cash you need without having to pass a credit check.
3. Lower Interest Rates:
Loans against fixed deposits charge lower interest rates than other loans. This can result in considerable cost savings during the loan's term, making it a financially viable option.
4. Fixed Deposit Benefits Retained:
By taking a loan against your FD, you keep its benefits. This means you may continue to earn interest on your fixed deposit while still having access to the funds you need.
5. No Prepayment Fees:
Loans against FD often do not have prepayment fees. This allows you to repay the loan ahead of schedule without incurring additional costs. So, it saves you money in the long run.
6. Minimal Documentation:
Loans against FD need less documentation than standard loans. This might save you time and bother by expediting the process of obtaining more cash when needed.
7. Flexible Loan Amounts:
FD loan allows for flexible lending amounts. The value of the fixed deposit decides the loan amount. It can be anything less than 80-90% of your FD’s worth.
How to Take a Loan Against FD?
The procedure of asking for a loan on FD is straightforward. You can apply for the loan online using your net banking account or by visiting a nearby branch. To begin the application process, you must send a properly completed application form, together with your FD receipt and any other relevant papers.
Things You Need to Know Before Applying for a Loan Against FD
Before taking out a loan on a fixed deposit, it's critical to understand some vital facts. Here they are:-
- First, be well-informed about the loan's interest rate and compare it to other accessible possibilities.
- Additionally, you must also know how much money you can get as credit against your fixed deposit.
- It's also vital to verify with your bank about any processing fees that may apply.
- Furthermore, remember that putting your FD as collateral implies that it cannot be withdrawn until the loan is repaid.
- Late EMI payments may result in fines. So make sure you pay on time and are aware of repayment conditions such as instalment amounts and frequency.
- In addition to this review process, consider how taking out a loan fits into your overall financial condition and aspirations.
- Get counsel from a financial expert or speak directly with your bank for clarity on any pertinent terms before making any commitments.
FAQs
1. What is the interest rate charged for a loan against FD?
Banks and NBFCs often charge a 0.5% to 2% interest rate above the appropriate FD rates.
2. Can senior citizens apply for a loan against FD?
Yes. Everyone with an FD account (not in the name of a juvenile) can use this service.
3. What are the charges to be paid for a loan against a fixed deposit?
There are no expenses to pay for taking out an FD loan. Interest is applied, which is often up to 2% more than the appropriate card rate.
4. Can I get a loan against my fixed deposit using Internet banking?
The online facility for obtaining an FD loan differs across banks.
5. Which documents are required to apply for a loan against FD?
When asking for a loan against FD, you may need to provide an ESC mandate, application form, cancelled cheque, and FD receipt, among other documents. Please keep in mind that this is simply an indicative list. Your bank can tell you the precise documents you need to acquire the loan.
6. How much of a loan can you get against your FD?
Depending on the bank, the loan amount may be up to 95% of the deposit.
7. What is the tenure within which the loan against fixed deposit should be repaid?
Loan against FD must be returned before the fixed deposit matures. It cannot, under any circumstances, extend the term of the FD used to secure the loan.
8. Does a loan against FD affect CIBIL score?
If you fail to repay the loan taken against your fixed deposit before its maturity date, it will affect your CIBIL score.
