Loan Against FD A Smart Way To Borrow Without Risk
FDs are, may be, the most popular investment in India where returns are assured and risk is negligible. There could be times, however, when you’ll need cash in hand but do not want to encash FD before time. That’s when loan against FD seems a good financial option. This article gives you the entire, step-by-step process to avail of a loan against FD in India, and details about loan against FD interest rates so that you can make your own informed decisions.
What is a loan against FD
FD loan is an overdraft facility extended by banks and non-banking financial organizations (NBFCs) wherein the borrower puts his fixed deposit as security. The lender may perhaps not utilize the FD but can certainly make cash funding arrangements for part of the deposit. The loan will generally be with low interest because there is relatively less risk being taken by lenders compared to the case of unsecured loans against personal ones.
Advantage of availing loan against FD
Assuming before availing this loan process why it is advantageous:
- Instant sanction: Banks and NBFCs sanction loan against FD instantaneously.
- Lower rate of interest: Compared to personal loans, the rate of interest of loan against FD is quite low, ranging from 9% to 13% annually.
- Assets are not sold: Your FD is not touched and still earns interest despite the use of the loan.
- Flexibility: The tenor of repayment as well as tenor are often tailored to the borrower’s requirements.
- Lower documentation: As your fixed deposit will be used as collateral, there is lower documentation.
Step 1: Eligibility and type of FD
Begin by verifying if you are eligible for an FD loan. Banks generally require you to have:
- Resident status in India
- The same bank’s fixed deposit
- Hand (bank specific) 6 months and above FD
- Sufficient loan amount based on the value of your FD
Verify that your FD is a term deposit with loans facility. Cumulative FDs or tax-saving FDs are usually lock-in. Re-check your bank.
Step 2: Select the loan amount and rate of interest for loan against FD
Banks offer you loan of 70% to 90% of FD value. You have an FD of Rs. 1,00,000. You are eligible to get loan of Rs. 70,000 to Rs. 90,000 subject to bank policy.
The loan against FD interest rate will be 1-2% higher than FD rate of interest, i.e., 5.5% to 7%. If your FD rate is 6.5%, your loan rate of interest will be approximately 8% to 9%.
You will have to specifically ask your banker loan against FD rate of interest since it varies in public sector banks, private sector banks, and NBFCs.
Step 3: Documents ready required
Loan against FD is a low-document loan since it’s a collateral loan. All of the below documents are utilized the most:
- Fixed deposit receipt or statement
- Identity proof (Aadhaar card, PAN card, passport)
- Address proof (utility bills, ration card)
- Passport size photos
- Income proof (optional but helpful in case of high values)
Having your documents ready makes it faster.
Step 4: Visit the bank or NBFC
Visit your branch bank or qualifying NBFC along with required documents. Online application services may also be searched, if available. Loan against FD application form is to be filed.
The banks would typically check the validity of your FD and calculate the disqualifying loan amount based on the deposit’s principal and maturity.
Step 5: Continue sanctioning and disbursal of the loan
After verification of your application, the bank approves the loan. You are paid money in your savings account or you are paid money in the form of cheque or demand draft as you would like.
The loan period is usually 3 months and a maximum to the loan period of your Fixed Deposit term. You gain by paying interest only on the loan amount and earning interest on your Fixed Deposit.
Step 6: Mode of repayment and pre-closure
FDs can be redeemed at will. Interest is paid monthly in some instances, and the amount is repaid at maturity. EMI facilities are also offered by some banks. Payment is also refunded even before maturity without any fee.
Pay timely so that the bank will not cash your FD to receive the payment back.
Aspects influencing loan against FD interest rate
Interest rate against loan on FD may vary with the following:
- Public sector bank, private sector bank, or NBFC bank
- Tenor of the loan and loan size
- Credit rating of the borrower (though lower as the loan is collateralized by securities)
- General economic conditions and base rates determined by RBI
Public sector banks, for example, can offer marginally lower interest rates but more stringent terms of lending.
Key points to keep in mind while availing loan against FD
While loan against FD is a very helpful credit facility, the following are some points to keep in mind:
- Never increase the loan amount above the amount of FD; avoid over-borrowing.
- Defaulting will make your FD get auctioned and interest go waste.
- Compare the rate of interest of loan with FD at different lenders before choosing and negotiate with a good bargain.
- Confirm if your FD qualifies under the loan as tax-saver or special schemes FDs are not qualified.
- Confirm processing fees and prepayment charges incurred.
Alternatives to loan against FD
If you do not have an FD or need higher than your FD limit, you can take other loans like personal loans or overdraft facilities. They are charged at a higher rate of interest and for a longer processing time.
Tips for better loan against FD experience
- Maintain a good banking history to be eligible.
- Use e-FD receipts so that it would be convenient to confirm. Financial Planning.
- Keep a copy of your payment and loan statements.
- Choose your loan tenure as per your need.
For getting complete information regarding personal loans and other secured loans, you may read appropriate articles on good finance websites.
Borrowing a loan against FD is a wise choice for your short-term liquidity requirements without the need to disinvest your investment. It is relatively lower in sanction speed and interest rate compared to unsecured loans. Being well-informed about the process—from eligibility, loan against FD interest rate, documentation to repayment—equips you to make entirely rational money choices.
Availing the loan against the fixed deposits step by step becomes viable for the Indian investors. Carefully contrast the interest rate of loan vs FD and choose the proper one to gain maximum from this money product. Under proper planning, the loan against the FD can prove to be an effective tool for your personal finance plan.
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