Loans against Fixed Deposits

By | December 16, 2015

Loan Against Fixed Deposit

Financial crunches are like gatecrashers at a party, of course, without any warning. And more often than not, most of us are not quite prepared to deal with the urgent need of liquid money to face the financial crisis.

While selling of assets at lower prices or applying for a Personal Loan with high interest rates are the methods we generally resort to when in need of urgent cash, we tend to overlook the traditional loan against Fixed Deposits that can be very useful during liquidity crunches.

How does it work?

A Fixed Deposit not only allows one to enjoy the interest on the principal amount deposited for a fixed tenure, one can even apply for loan against Fixed Deposits. Most banks in India sanction loans up to 90% of the value of Fixed Deposit. One of the biggest benefits of loan against Fixed Deposit is that the interest rates are lower as compared to Personal Loans, which are unsecured loans. It ensures that you don’t have to sell your assets at lower prices to fulfil your urgent financial needs.

Since the bank lends money against the FD, this type of loan is considered a secure loan and hence the interest rates are quite reasonable. The loan is given in the form of an overdraft against your FD amount. This is a better alternative as compared to breaking your FD prematurely.

Generally, there’s no processing fee involved. What more? In most cases, there’s no prepayment penalty either!

What is the interest rate on the loan against Fixed Deposit?

The interest rate on the loan against FDs varies from bank to bank. However, it’s generally 1-2.5% higher than the interest paid by the bank on the FD amount.

Are joint FDs or FDs held by minors eligible for a loan?

One should be aware that a bank doesn’t approve loans against FDs held under a minor’s name. And if a Fixed Deposit is jointly held by two or more people, then the loan documents need to be signed by all the account holders. This means that all the holders of the joint Fixed Deposit will be held responsible for the repayment of the loan.

What happens after the loan is approved?

Even after the loan is granted, the account holder will continue receiving the interest on the Fixed Deposit amount. The loan needs to be repaid before the tenure of the FD come to an end.  A bank may allow the Fixed Deposit account holder to repay the loan amount in either EMIs or lump sum. If the borrower fails to repay the loan, then the bank has the authority to close the FD account and recover the debt. Being a secured loan, it is easier to acquire loans against Fixed Deposit compared to other loans.

So next time when you are in urgent need of money, remember that loan against Fixed Deposit can be your saviour!

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