When emergency arises, you start looking for sources where you can arrange money from. You forage for assets that you can offer to get loan from the bank or else start looking for personal loan providers. Have you ever thought that the fixed deposits that you made years ago could come to your rescue? You just forgot them because you are under the impression that they would pay you only at maturity!! This isn’t true. You can get loan against your fixed deposits too, at attractive rates of interest.
Loan against fixed deposits are given to you as overdrafts against your fixed deposit amount. The bank requires you to deposit your fixed deposit papers with them and fill up a form to apply for loan against your fixed deposit. You have to pay an interest of a few percentage points over and above of what you get as interest on your fixed deposit, for example 2-3%. So effectively if you get 9% as interest and get a loan at 11%, you get your loan at an effective rate of 2% only.
Your loan amount falls anywhere between 70-90% of the total value of your fixed deposit. When looking for loans of small amounts, loan against your fixed deposit would be a great idea.
The only problem is that you would not be able to break your fixed deposit and withdraw the principal amount till the day you repay the whole loan in full amount. So small amount loans are good if taken against fixed deposits. Term deposit papers clearly state- The depositors shall not close the term deposits/withdraw the amounts of the term deposits during the subsistence of the facilities. The bank shall have a lien on the amounts of the term deposits as also any further deposits placed by the depositors with the bank irrespective of any other lien or charge, present or future.
As far as the other costs are concerned, most banks do not charge any processing fees for these loans. These loans are thus, cheaper than any other loans of the same value. While some banks let you take loans for free, other charge very low fees for the same, definitely lesser that personal loans of the same amount.
You also have a facility of foreclosing the loan. If you have money that you wish to repay before the actual tenure ends, you are free to do so. That is what foreclosure means. In other type of loans, banks do not wish that you pay earlier than when you are bound to since their funds flow falters as compared to what they forecast and due to this variance they charge you extra if you foreclose your loans. But in loans against fixed deposits, such fees and charges are not applicable. You can prepay your loan whenever you have extra money, without paying any extra amount.
As far as tax benefits are concerned, salaried individuals cannot get tax benefits on the interest paid on loans against fixed deposits. Self-employed individuals using the funds for the purpose of business can deduct the interest paid as a business expense from their business income and pay tax on the remaining amount only.
Things to note:
You have to be careful when applying for loan against your fixed deposit when the maturity of the loan is near. Since the maximum tenure of the loan that you take can only be up till the maturity of the fixed deposit, you will have to pay very large EMIs to pay it off soon. So before taking loans, check the maturity date of the fixed deposits that you have, offering those fixed deposits to the bank whose maturity dates are the farthest. You must ask how much EMI you will have to repay and understand that you have to repay this money from whatever you earn each month. Analyse this against your salary and avoid taking loans where the EMI falls to be more than 20-25% of your monthly salary. Many banks also offer bullet or one time repayment. You should check what suits you.
Few other points that should be kept in mind include that loans are granted only against deposits which are free from lien, restraint or encumbrance and not in a minor’s name. In case of a joint holding, all holders of the deposit have to sign the loan documents. The liability to repay lies with all the holders of the deposit. Interest will continue to be paid on the underlying deposit. Repayment can also be structured as EMIs.
Here is a table for your reference and comparison:
|IngVyasa||Citibank||Deutsche Bank||Punjab national|
|Duration||7 days to 10 years||As per fixed deposit tenor||7 days to one year||As per fixed deposit tenor|
|Amount||Upto 95% of deposit amount||Upto 90% of deposit amount||Upto 95% of deposit amount||Varying with time to maturity|
|Interest rate||2% over and above applicable interest rate on deposit||2% over and above applicable interest rate on deposit||2% over and above applicable interest rate on deposit||2% over and above applicable interest rate on deposit|