What is a loan against FD? Borrowing against your fixed deposit (FD) can be a convenient and simple way of raising money without risking your investment. Banks offer the facility at interest rates marginally higher than you earn on the deposit, and hence is a suitable alternative source of short-term liquidity. But what is like a dream fulfilled has certain implications to be realized before one takes a call.
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How is the borrowing process carried out? When you take an advance against your FD, the bank uses your FD as collateral. You can withdraw 75% to 90% of your FD value, depending on the bank. The FD continues to earn interest, and the interest on the loan is typically 1–2% above your FD rate of interest. The terms of repayment are negotiable, but the loan must be repaid prior to your FD maturity.
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What are the key advantages? One of the finest advantages of such a loan is that it is a secured loan, and hence you don't need a good credit score or much documentation. It is approved instantly, within a few hours, and you don't lose your FD or its interest if you repay on time. There are no prepayment penalties, and you can use the amount wherever you want—personal expenses, emergencies, or even business needs.
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What are the limitations and risks? Though the loan is low-risk, it has consequences anyway. If you fail to repay in time, your FD can be encashed by the bank to get back the amounts. Also, the interest saved with a personal loan may not be worthwhile if your FD rate is already low. For long-term or large loans, better alternatives may be available elsewhere. In addition, if you must withdraw the FD prematurely to service the loan, there may be premature withdrawal charges.
Under what circumstances should you take this loan? A loan against FD is best for immediate or short-term requirements if you do not want to withdraw from your savings. It preserves your discipline of investment while making funds available to you at decent terms. But it will not be suitable for big-ticket purchases or when you can obtain cheaper or more convenient credit from other sources like top-up of home loans or secured credit lines.
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Compare the trade-offs Borrowing against your fixed deposit is an astute choice if done sensibly and for the right reasons. It leaves your money safe and offers decent credit, but it is not the answer to everything. Evaluate your needs, compare alternatives, and make sure you can repay the loan in time before putting your FD as collateral.
