Individuals seek loans from a variety of lenders while they are in a fiscal crisis. Applying for loans against fixed deposits (FDs) from banks is one of the options that your bank sanction in just a matter of minutes. Rather than unnecessarily closing your FD, you can conveniently apply for a loan against your FD. Overdraft and loan against FD are the two options for borrowing money against your fixed deposit. The fixed deposit-backed overdraft or OD cap is lower than the deposit amount, but the interest paid is higher than the applicable FD rate. That being said, interest is only levied on the amount borrowed as an overdraft. Here're the 10 facts to know while applying for a loan against your fixed deposit.
1. A loan against FD (Fixed Deposit) is a type of secured loan in which customers pledge their fixed deposit as collateral in return for a loan. The loan amount is determined by the amount of the FD deposit. This can be somewhere between 90% and 95% of the deposit amount. You don't have to break your FD to get a loan against it; alternatively, you can borrow against it.
2. In the instance of an overdraft, banks set a cap that can be as high as 90% of the deposit amount. For e.g., if you have a Rs 1 lakh fixed deposit with any bank, the bank will grant you an overdraft limit of Rs 90,000. This ensures you can only withdraw up to Rs 90,000, and you will only be charged interest on the amount that you have withdrawn from your fixed deposit account.
3. Anyone with a savings account, regardless of salary, profession, or credit score, can apply for a loan against their FD.
4. A loan against a fixed deposit can be obtained by any fixed deposit holder, whether an individual or a joint account holder. A loan against fixed deposits cannot be taken out in the name of a minor and also a depositor with a 5-year tax saving fixed deposit cannot apply for a loan against his or her FD account.
5. Loans against FD can be taken out by both salaried and self-employed individuals, regardless of their profession. To qualify for this loan, you do not need to have a decent credit score. Loans against fixed deposits have a lower interest rate than most unsecured loans, such as personal loans, and there are no processing costs or the need to break the FD. The loan balance can be repaid in instalments or as a lump sum, but not until the FD term has ended.
6. For loan against FD, banks usually charge 2% more than the FD rate. However, the largest lender of the country State Bank of India charge 1% above the relative time deposit rate on loan against fixed deposits. Thus, if your FD pays 6% interest, you may have to pay up to 8% interest on the loan amount. Some banks still offer online loans against FDs, but online loans against FDs have a cap. If the loan amount is high, the applicant will be required to visit his or her nearest bank branch physically.
7. A corporate fixed deposit can also be used to apply for a loan. There are, though, some terms and conditions. Just three months after opening the FD you can take out a loan against it. In the case of corporate FDs, a loan of up to 75% of the deposit amount is available. These loans can be repaid in one lump sum or in instalments until the fixed deposit matures. In case you didn't repay the loan before the FD matures, the loan amount, as well as any accrued interest, will be deducted from the remaining fixed deposit amount at maturity.
8. When an individual takes out a loan against a fixed deposit, the bank uses the FD as collateral. If a fixed deposit holder defaults on the loan, the bank will possess the fixed deposit to claim back the funds lent.
9. Banks generate FD Lien, which are similar to charges. Banks are given an automatic claim on the deposit against which the loan was made.
10. If you don't have a fixed deposit account then a personal loan, an early withdrawal from an FD or credit card against fixed deposit might be a safer and affordable choice. As a result, the loan against fixed deposit option is similar to a short-term loan, though it is preferable to use the loan amount to cover short-term goals.