Loan Against FD – Unforseen occurrences and emergency situations befall everyone. Such circumstances may at times call for immediate cash. When under these situations, some people opt to liquidate their fixed deposit investments before they have fully matured. While this is not that bad of an option, there is a better option that you would do well to consider when in need of immediate cash flow. This is; getting a loan on fixed deposit (FD loan or loan against FD).
What is a Fixed Deposit?
A fixed deposit (FD) refers to a type of saving’s account which offers a person a fixed amount of interest rates. There is, however, a catch when it comes to having a fixed deposit account; an investor should not makes any cash withdrawals or even access the funds whatsoever, within the agreed duration of time. With fixed deposits, all the accumulated interests are usually paid at the end of the agreed period of time. Fixed deposits are advantageous in that they offer larger interest rates.
What is Loan on Fixed Deposit?
An FD loan is a secured type of loan. This means that a person can use their fixed deposit as collateral, in order to qualify for the applied loan. Fixed deposit loans are always obtained from banks. Getting a loan on a fixed deposit has many benefits that give it the added advantage over other solutions that offer immediate cash. First, a fixed deposit loan saves a person the inconveniences of breaking their fixed deposits prematurely.
The amount of loan that a person will receive is dependent on the amount of the fixed deposit (FD), going up to 90% – 95% of the total FD amount. However, if an investor has held a fixed deposit saving’s account for more than 2 years, then they become eligible for loan amounts that exceed their fixed deposit amounts. This is because, after 2 years, the fixed deposit amount will have accrued quite a large amount of interest.
Furthermore, getting a loan on fixed deposit saves a lot of time and ensures faster access to a short-term loan. Getting FD loans is quite a simple process, with the entire process taking less than 24 hours. Also, few and easily accessible documents are required so as to qualify for a loan.
FD Loan Eligibility
The good news is that even with a low credit score, you can still qualify for a loan on a fixed deposit. Also, you are not required to have any other assets so as to secure for yourself a fixed deposit loan, neither is it a must that you meet an income eligibility criteria.
However, there are certain set requirements that a person should meet if they are to acquire FD loans. The following points highlight the set FD loan eligibility criteria:
- A person applying for the fixed deposit loan should have a fixed deposit saving account. This could either be an individual account or a joint account.
- The fixed deposit investor should not be minor but should be of legal age.
- An investor should not have a fixed deposit that is a 5-year tax saving.
Documents Required for Loan Against FD
In addition to meeting those set requirements, there are also documents that a person is required to submit, if they are to be approved of the applied fixed deposit loans.
These documents required for FD Loan include:
- An application form for the FD loan
- A canceled cheque for the non-cumulative fixed deposits
- Fixed deposit receipts (ECS mandate) for the non-cumulative fixed deposits
- An overdraft agreement with the particular bank
- Some banks may require that an investor be a resident citizen of the India-Hindu Undivided Family (HUF).
Loan Against FD Interest Rate
Normally, loans against fixed deposits charge interest rates of between 1% and 2% above the fixed deposit rate. They also require that a person pays them off within a duration of up to 60 months. When a person qualifies for a fixed deposit loan, it is usually reimbursed as either an overdraft or a demand loan.
Comparing the loan against fixed deposit interest rates with the interest rates charged by other types of loans, you realize that the interest rates of FD loans are way much cheaper. For instance, while personal loans charge very high-interest rates of between 16% and 24% more than the fixed deposit rates, loans against FD charge interest rates of between 0.5% and 2% more than the fixed deposit rate.
The end result of going for a loan on fixed deposit, therefore, is saving a large amount of money that would have otherwise been spent on paying more interests for personal loans that lack collateral.
Loan Against Fixed Deposit Disadvantages
It is true that loans on fixed deposits bring along many associated benefits, and can really come in handy during times of need. However, such loans also have a few disadvantages, as explained in the points below;
- Risk of Foreclosing Fixed Deposits: This can happen in cases where the investor does not manage to pay off the loan. The bank can then decide to foreclose the FD account so as to regain the money lent. Furthermore, the tenure of the FD loan disbursed does not go over the residual tenure of the FD.
- Fewer Loan Amounts: Basically, a person cannot guarantee FD returns. The interests earned by fixed deposits also tend to be lower compared with other short-term investments. These aspects of fixed deposits can lead to fewer loan amounts disbursed to an investor.
- Liquidity: Getting a loan on FD calls for premature withdrawals of fixed deposits. When an investor withdraws their fixed deposits before the set agreed time, they are charged some penalty fees. The total interest on the FD will also amount to a lower rate, that was supposed to be in the original agreement.
So, when you’re running low on cash and are thinking of ways on how you’ll get immediate cash, try out a fixed deposit loan. These loans can help to raise some short-term cash. However, remember to have a good repayment plan, so as to avoid any inconveniences associated with defaulting on FD loan payments.