Getting a loan in times of emergency can seem like a hassle, given the amount of paperwork one has to do, and in case of a secured loan, the collateral the borrower has to pledge with the lender in order to secure the loan. However, people typically prefer secured loans, as they come with a lower rate of interest than those offered on unsecured loans, as they are given against a collateral, which makes them less risky for the lender.
From the borrower’s perspective, it is just like another loan which they will have to repay on time. Defaults could lead to confiscation of the pledged collateral by the lender.
Among the many assets one can pledge as collateral for a secured loan are home, gold ornaments, shares and mutual funds and even fixed deposits (FDs). One advantage of taking a loan on an FD is that you can take a loan on it without liquidating it and letting it mature till its due date of maturity.
What are Loans against FDs
A loan against an FD is a secured loan where the borrower pledges his/her FD as a collateral and takes a loan against it. The amount of loan approved by the bank depends on the total amount of the FD pledged as collateral. Usually, banks offer loans up to 75-90 per cent of the FD, depending on their credit policy.
Who Can Take Such Loans
Typically, loans against FDs can be availed by all types of FD holders, be it individual account holders or people who have joint accounts. But if the FD account is in the name of your minor child, you will not get any loan approved on that FD.
One important thing to note is that such type of loans are also not available on 5-year tax-free FDs.
Benefits of Loans against FDs
There are several benefits in taking a loan against an FD. These are:
Loan amount of up to 90 per cent of the FD can be availed of by the borrower depending on the sanction limit approved by the lender. This decided amount does not depend on the borrower’s income or debt-to-income ratio, which is usually the case with other types of loans.
The rate of interest usually depends on the rate of interest offered on the FD being pledged as a collateral. The rate of interest on the loan is typically 2 per cent higher than the deposit rate on the FD. However, this rate is also not fixed and differs from one bank to another.
The loan approval process does not require any know-your-customer (KYC) documentation or income documents. Credit score is also not a necessity in such cases.
There are no processing fees on such loans. Also, no penalty charges are levied for loan prepayments.
The decided loan amount gets credited to the borrower’s bank account almost immediately.
The rate of interest on the loan has no bearing on the interest earned on the pledged FD.
These loans can be paid in a lump sum or in instalments. Repayments can also coincide with the maturity date of the fixed deposit.
Afzal Payak, loan and debt syndication expert and founder of 100 Ways Group, "When you have excess funds and you wish to pay the lowest ROI with your capital secured, that is when you should borrow loan against FD. Fixed Deposits are standard products, so tax saving is applicable on all, while borrowing loan against FD you keep it as collateral to bank in case of default".
These types of loans can prove highly beneficial for individuals who are in need of quick funds and who possess FDs with their banks. With faster processing time and less complicated requirements compared to other loans, it is a cost-effective and convenient way to fulfil one’s immediate credit requirement. But you must also remember to repay the loan as quickly as possible, as the rate of interest on the loan is usually 2 per cent higher than what will be earning on your FD, which essentially means that you are earning less from your FD than what you are paying on the loan.
