There are many options to borrow money provided your credit score is good and your income remains stable to justify that you will repay the borrowed money on time with interest. Your financial history gives lenders the confidence to lend you without hesitation. At times your investment comes to your help when you feel you have no other collaterals to give.

Often people are confused where to borrow from as emergencies come unannounced and can often cripple one’s finances. However, access to funds in an emergency has become much easier today, with many retail credit products easily available.

Let’s take a look at one such product – loan against fixed deposits (FD).

What is Loan against FD?

A loan against fixed deposits, also known as Loan against FD, is a type of secured loan where an FD holder can avail of a loan against their fixed deposits. This type of loan is easily available at most banks or financial institutions which offer FDs and has become a rather popular form of availing credit in today’s times. ‘MoneyMood’, an annual report published by BankBazaar on credit trends, reflects this trend and notes that Loans against FDs have grown by 16.47% year-on-year, rising from Rs 97.5 crore in 2022 to Rs 113.9 crore in 2023.

Also Read: Loan cleared but status unpaid? Here’s what you need to do now

Let’s go through some basic features of a loan against FDs to help you understand the product better and gauge whether it is suited for your needs.

Interest rate

Interest rates strongly influence your ability to borrow. In the case of loans against FDs, lenders usually charge an interest rate that is 0.75% to 2% higher than the prevailing FD interest rate. This is because the FD serves as collateral, which lowers the lender’s risk, allowing them to offer a lower interest rate. In many cases, this rate may be lower than what is offered on unsecured loans, such as personal loans, which typically charge interest starting from 10% and above. Moreover, since the interest rate is fixed, the borrower is saved from interest rate fluctuations typically associated with some secured loans.

Loan amount

The loan amount typically available under this type of loan starts from 85% and above of the deposit amount.However, certain lenders may have a minimum deposit requirement to offer the loan against deposit facility.

Loan processing & documentation

Like fixed deposits, loans against FD come with a quick processing and approval time. This is because the FD, against which the loan is being taken, serves as collateral, thus eliminating the need for the extensive verification of the borrower’s financial history. As a result, the loan can be processed with minimal documentation.

Collateral and guarantor

In the case of a loan against FD, the borrower retains ownership of the FD which serves as collateral. Since the loan is secured with the FD, the borrower does not need an additional guarantor, thus making the loan process simpler and quicker. The FD continues to earn interest during the tenure of the loan at the pre-determined rate which the borrower may use to pay off the outstanding interest due on the loan.

Repayment tenure and prepayment

Repayment terms for loans against FD are usually flexible and the borrower can pay in Equated Monthly Instalments (EMIs). However, the repayment must be done before the FD matures. As a result, the loan repayment tenure remains fixed, allowing the borrower to plan their finances. Also, many lenders may not levy prepayment charges on this type of loan, which are usually levied on other types of loans.

Eligibility

The basic requirement to apply for this type of loan is to hold an FD account with the bank or financial institution. Resident Indian citizens, family trusts, Hindu Undivided Families (HUF), clubs, societies, associations, sole proprietorships, group companies, and partnership firms are eligible to apply for this loan.

Adhil Shetty, CEO, Bankbazaar.com, says, “The benefits offered by loans against deposit are plenty, but like any other loan, you must exercise caution when applying. First and foremost, assess your requirements and finalise the loan amount you need. Ensure timely repayments on your loan to avoid an adverse impact on your credit score. Lastly, carefully review the terms and conditions, especially the interest rate, repayment options and prepayment clause, before committing to it.”

Hope these tips will help you take a wise decision when you look for borrowing against your fixed deposit investments.