Fixed deposit is traditionally the favourite investment instrument of Indians. Over the years, fixed deposits have inculcated the habit of saving in Indians and helped them earn attractive returns. While these deposits stand a good investment tool, they can also help you tide over a financial emergency. Loan against fixed deposit is a great way to meet your financial needs without depleting your savings.
Since these loans are secured against your fixed deposit, they can be availed at a lower interest rate than an unsecured personal loan. At the same time, you can continue earning interest on your fixed deposit. You can use an FD calculator to find out the total amount you earn as interest on your fixed deposit and the interest that you will have to pay on the loan.
Loan against Fixed Deposit
Banks give out loans as overdraft against fixed deposits. There are a few things you must know before applying for such a loan-
· One can get a loan for up to 90 percent of the total value of fixed deposit.
· Most of the banks do not charge any processing fee on loans taken against fixed deposits.
· The rate of interest charged on these loans will be 2-2.5% higher than what the bank is currently offering you on the fixed deposit.
· Loan against fixed deposits have to be paid off in easy EMIs like any other loan.
· Such loans can stand as good alternatives for personal loans which are usually high-cost and come with several other charges.
Before taking a loan against fixed deposit, you must calculate the interest that you will have to pay using an EMI calculator and the interest that you are earning on your deposit with the help of an FD Calculator. Let us understand this with the help of an example-
Suppose you have a fixed deposit of Rs 1 Lakh with the bank and you wish to take a personal loan of Rs 70,000. Now you earn interest at the rate of 6% on your FD and the interest that you will have to pay is at the rate of 8%. On the other hand, most of the personal loan offerings start at 12%. So loan against fixed deposit can be a worthy deal if you need a small loan and don’t want to risk any asset as collateral.
Benefits of Taking a Loan against Fixed Deposit
Taking a loan against your fixed deposit not only serves as a good alternative for personal loan but at the same time it can be one of easiest ways of meeting a financial urgency. By taking a loan against fixed deposit, you can enjoy the following benefits-
Lower Interest Rate- Since the loan is secured against your fixed deposit, bank will charge a lower rate of interest than what it would charge on an unsecured personal loan.
Hassle Free Borrowing- Having a deposit with the bank adds to your creditworthiness quotient. At the same time, you will have to provide lesser documents as you are already a customer of the bank.
No Prepayment Penalty- Most of the banks do not charge any pre-payment penalty on loans that are secured against fixed deposits, whereas, prepayment in case of a personal loan may cost around 1-3% of the outstanding amount.
Low or No Processing Fee- When you take a personal loan, lenders charge a processing fee of 1-3% of the amount borrowed. However, in case of loans taken against fixed deposits, banks do not charge any processing fee. Even if they do, it will be a negligible amount.
So, this way a fixed deposit is not only a great saving instrument, it can also be a saviour whenever you face a financial emergency. While it may be a great alternative for personal loan, there may be other types of loans that come with lower rates. So, you must compare other available options thoroughly before signing on the dotted line.
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