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Loan Against Fixed Deposit: All You Need To Know

A fixed deposit (FD) is a well-liked and safe investment choice for people who want to increase their savings while earning a guaranteed return. However, life is unpredictable, and there may be moments when you need quick cash for unanticipated costs or investment opportunities. In these circumstances, a loan secured by your fixed deposit may be a sensible and practical choice. This article discusses loans against fixed deposits, including who is eligible, its benefits, and drawbacks. 

What Is Loan Against Fixed Deposit?

A loan against a fixed deposit, sometimes referred to as an FD loan or an overdraft against an FD, is a financial instrument that banks and other financial institutions provide that enables customers to borrow money against an existing fixed deposit. Simply put, it allows you to apply for a loan using your fixed deposit as collateral without prematurely reducing the deposit.

How Does It Work?

Your fixed deposit is used as security by the bank or financial institution when you apply for a loan against it to cover the loan amount that will be disbursed. Usually, up to 80–90% of the total value of your FD might be used to sanction the loan amount that you request. Due to the FD’s role as a guarantee and the lender’s reduced risk, interest rates on these loans are typically lower than those on personal loans. Usually, the loan’s term is limited to the time left on your FD. As you repay the loan, the money is taken out of the fixed deposit, which still earns interest on the amount left.

Top 5 Benefits of a Loan Against a Fixed Deposit

1. Reduced Interest Rates

The lower interest rate is one of the main benefits of choosing an FD loan. Since the fixed deposit serves as security for the loan, the lender views it as a secured loan and charges lower interest rates than for unsecured loans like personal loans or credit cards.

2. Quick and Simple Processing

Since the bank holds your FD as collateral, processing a loan against one is generally simple and quick. You only need to fill out a small amount of paperwork, and since the FD itself acts as security, you don’t need to undergo a thorough credit check.

3. Keep Fixed Deposit Perks

When you borrow money against a fixed deposit, you keep all of the FD’s perks. Even while you have access to the loan amount, the FD’s remaining balance continues to earn interest, ensuring that your savings grow.

4. No Prepayment Penalties

Most banks and financial institutions do not impose prepayment penalties on loans that are repaid before the agreed-upon duration, making them flexible borrowing options.

5. Upholds Credit Score

 On-time repayment of the loan secured by an FD aids in preserving or boosting your credit rating. Your credit history and creditworthiness will both benefit from this sensible behaviour.

Drawbacks of a Loan Against a Fixed Deposit

1. Blocked Fixed Deposit Amount

While you have access to money through the loan, the bank has blocked the corresponding amount in your fixed deposit. As a result, you are unable to withdraw funds or close the FD until the loan has been fully repaid.

2. Lower Loan Amount

 You can only borrow a certain proportion of the value of your FDs in total. Consider other financing choices if you require a larger loan amount.

3. FD Liquidation on Default

If you don’t pay back the loan within the allotted time, the bank has the authority to liquidate your fixed deposit in order to get the money you owe. This can cause you to lose interest and have an effect on your financial objectives.

Also Read: Benefits of Credit Cards Against Fixed Deposits

Who May Apply for a Loan Against a Fixed Deposit?

For those who have a fixed deposit account with a bank or other financial institution, a loan against a fixed deposit is often an option. The qualifications for applying for a loan against FD may differ significantly from lender to lender, but generally speaking, the following people are eligible:

1. FD Holder: People with currently fixed deposits with banks or other financial institutions are eligible to apply for loans secured by their FDs. The applicant must possess the primary account and have their name on the FD.

2. Resident Individuals: The majority of lenders provide this lending option to resident individuals or those who are nationals of the nation in which the bank conducts business.

3. Senior Citizens: A lot of banks provide older persons with preferential interest rates and lending terms through special loan programmes secured by fixed deposits.

4. Partnership Firms and Companies: Companies and partnership firms may be eligible to apply for loans based on their fixed deposits with certain banks and financial institutions.

5. Trusts and Charitable Institutions: Trusts and charitable institutions could occasionally be qualified to request a loan against their fixed deposits.

6. Solo Proprietors: If you are a solo proprietor running a business, you may be qualified to apply for this loan type.

It is significant to note that lenders could have special terms and conditions for obtaining a loan against a fixed deposit. Thus, it is advised to verify with the individual bank or financial institution to understand their qualifying requirements.

To Sum Up

When someone needs money right away but doesn’t want to prematurely cash out their fixed deposits, a loan against fixed deposit might be a useful financial tool. It provides a reduced interest rate, swift processing, and aids in preserving the expansion of your funds. To make sure you can return the loan in the allotted time, you must first determine your ability to do so. Only then should you apply for a loan. Overall, when used properly, an FD loan can be a prudent choice to cover your immediate financial needs while protecting your long-term savings objectives. To ascertain whether this choice fits your unique needs and circumstances, it is advisable to speak with your bank or financial counsellor before making any financial decisions.

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