Loan against fixed deposits vs. personal loan: What’s cheaper?

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Loan against fixed deposits

Loan against fixed deposit (FD) allows you to take a loan by keeping your FD as collateral. Banks and financial institutions lend 80–90 percent of the amount of your FD. The best advantage is that your FD continues to earn interest even when it is pledged. The interest on the loan is usually 1–2 percent over the FD rate, making it one of the cheapest borrowings available. Since the loan is collateral-backed, the procedure is short and requires minimal documentation.

How personal loans work

Personal loans, however, are unsecured—i.e., you don't need to pledge any collateral. Personal loans can be availed for any purpose, ranging from a medical emergency to a marriage or a holiday. As they are unsecured loans, the bank levies higher interest rates, normally between 10 and 24 percent annually, depending on your credit history and income profile. The processing time is also a little longer as the bank has to evaluate your credit-worthiness before approving the loan.

Interest rate comparison

The biggest difference between the two is with regard to borrowing cost. For instance, if your FD earns you a 6 percent interest rate annually, then a loan against it will cost you 7–8 percent. But a personal loan will cost you 12–20 percent or even higher. So, a loan against an FD seems to be much cheaper. Plus, since it has a standing deposit as a guarantee, you won't lose your savings, and your investment increases.

Repayment flexibility and risk

An FD loan offers convenient repayment options—borrowers can repay either in instalments or as a lump sum prior to the maturity of the FD. On default, the bank can access the money directly from the FD without damaging your credit score. A personal loan, on the contrary, offers fixed EMIs and strict repayment terms. Delayed payments can result in penalties and impact your credit history negatively.

Which one should you choose?

If you have a fixed deposit already and need money short-term, using it to avail a loan is the more rational and cheaper option. It involves less interest, quick access to funds, and no dilution of savings. If you don't have an FD or need a sum larger than your deposit amount, a personal loan is a more suitable choice. Setting your money needs against your ability to pay will determine which one is more suitable for you.