Loan Against FD: 5 Key Factors to Consider Before Borrowing

When in need of immediate funds, taking a loan against a fixed deposit can be a convenient option. Before borrowing against your fixed deposit, it’s crucial to evaluate the implications. While this option provides quick access to funds, ensure it aligns with your financial needs and obligations. Here are the five factors to consider:

The loan limit against a fixed deposit is not just about a fixed percentage; it also depends on factors like the bank’s policies, FD tenure, and the borrower’s profile. Banks usually allow you to borrow a significant portion of your fixed deposit amount usually ranging from 70 per cent to almost the 90 per cent value. While the exact percentage depends on the bank’s policies and the tenure of your FD. Check with your lender to confirm your loan eligibility and suitability.

While lower than unsecured loans, the interest rate on a loan against an FD is generally higher than the FD rate by one to two percentage points. For example, if your FD earns six per cent interest, the loan would have an additional one or two per cent. Despite being less expensive than personal loans as a result, it is still important to weigh the whole cost of borrowing, including interest and other relevant fees, before accepting the loan.

The loan tenure usually aligns with the FD’s maturity period, meaning it must be repaid before or by the time the deposit matures. If the loan is not repaid, the bank can recover the outstanding amount by foreclosing the FD, which may lead to a loss of both the deposit and the interest earned. Therefore, it is essential to plan repayments carefully to protect your savings and maximize returns.

Loans secured by FDs are suitable for sudden financial demands because they are handled fast and frequently require minimal documentation. Unlike other loans, there are usually no restrictions on fund usage, allowing you to use the amount for personal or business purposes. However, it’s important to borrow only what is necessary to avoid unnecessary financial strain.

A loan against FD is not available to everyone. While Indian residents, Hindu Undivided Families (HUFs), and businesses like sole proprietorships and partnerships can apply, certain restrictions exist. In addition to fixed deposits made under five-year tax-saving plans, minors and a large number of non-resident Indians (NRIs) are not eligible. Before applying, it is important to confirm eligibility with your bank.