Those facing frequent short-term cash flow mismatches may find availing a loan against FD, in the form of overdraft facility more beneficial than closing their FD.
Loan against fixed deposit calculator: Facing a cash crunch and looking for a personal loan? Wait, you might just get a better deal in terms of the interest rate. And, it is possible if you have an existing fixed deposit in a bank. You just need to place the bank FD as collateral with the bank and avail a loan. The amount you get will be in the form of an overdraft (OD) against your bank FD. “Those facing frequent short-term cash flow mismatches may find availing a loan against FD, in the form of overdraft facility more beneficial than closing their FDs, “ informs Sahil Arora, Director and Group Head, Investments, Paisabazaar.com
But, what will the interest rate be charged on loan against bank FD in the form of OD? “Interest rates of loans against FD are usually 1-2 per cent higher than contracted rates of FD placed as collateral. However, the borrower will continue to earn interest on FDs used as collateral during the loan tenure.” This means, you do not have to break your FD and it keeps earning interest as per the contracted rate.
Interest rate calculation
For example, if you have a 5 year FD of Rs 3 lakh opened in 2018 at 7 per cent while currently, if the 5-year rate is 5 per cent, the interest rate will be based on the contracted rate of interest. “In such a case, the interest rate of the loan against FD will be 1-2 per cent above 7 per cent FD rate, depending on the bank. Most banks do not charge processing fees on availing loan against FD,” informs Arora.
The maximum amount that you can avail as a loan will depend on the amount of FD and the tenure left till maturity. “Banks usually offer up to 90 per cent of the FD amount as loans depending on the minimum and maximum loan amounts, if any, set by the bank. Loan tenure would depend on the residual tenure of the FD(s) offered as collateral, and the minimum and maximum tenure limits set by the bank. Banks usually extend the loan tenure on the renewal of the underlying FDs,” says Arora.
How to repay that loan against FD?
In most cases, such loans against bank FD is in the form of OD. So, you end up paying interest only on the amount withdrawn from your limit. “Borrowers can withdraw up to the sanctioned amount from the overdraft account and repay it as per his repayment capacity. Interest will be incurred only on the drawn amount till its repayment,” says Arora.
The right approach
In any kind of loan, you end up paying interest which eats into the earnings from your investments. If in the bank FD you earn 6 per cent per annum and simultaneous pay 8 per cent on loan against it, your effective return is impacted. Hence, opt for a loan against FD only when you need to meet any short-term cash crunch.