Loan Against Fixed Deposit

 FD is one of the most popular investment option in India due to its numerous advantages like safety, fixed interest earning and easy to understand product. And now you can easily get a loan against your FD even if you don’t have a credit score or meet any income earning eligibility criteria to apply for a loan.

So, One of the main advantage of holding a Fixed Deposit (FD) is that you can secure a loan amount below your FD amount, without actually breaking it!

Eligibility criteria, documents required and how to apply?

In order to apply for Loan against FD, you will have to approach your bank manager, fill the desired form and submit the important documents. Many banks such as PNB, HDFC etc… are offering online facility for loan against FD.

Eligibility criteria for taking the loan against FD

  • You need to have a year old active fixed deposit with the bank.
  • Applicant should be at least 21 years old
  • Applicant has to be resident citizen of India
  • Individual, sole proprietorship, societies, HUFs etc are eligible.

Documents required for taking the loan against FD

  1. Application form
  2. Fixed Deposit receipts
  3. A cancelled cheque might be required if the loan is being taken from financial institutions other than banks
  4. Duly signed agreement letter
  5. Passport size photographs
  6. Valid photo identity proof

Let us see a video to understand it more clearly –

Interests charged on the loan amount

The interest rates charged for FD loans as compared to traditional loan interest rates are very less. It is generally around 2% to 3% more than the FD interest rate.

Example – Ram is having a FD worth Rs 10,00000. He is earning an interest rate of 6.5% on his FD; if he applies for loan against FD then here he will be charged an interest rate of 8% to 8.5% on the loan. The interest charged here is much less than the average loan interest rate that usually ranges from 9% to 15% (varies from banks to banks).

Below is an indicative chart of different banks with interest rates on overdraft of FD

Is pre-payment of loan against FD allowed? If yes, how much is the penalty charged?

Yes, pre-payment of loan is allowed with no penalty charges. If you are thinking of taking loan against your FD, and you know that after few days or few months you can make pre-payment of the existing loan then you will be at profit because pre-payment is also allowed that too with no penalty charges.

How long can be the loan tenure?

The loan tenure against fixed deposits depends on the tenure of the fixed deposit. The tenure of loan will not be more than the term of fixed deposit. In most of the cases tenure of loan is 3 years.

Example – Sham wants to avail a loan on his fixed deposit (whose maturity is in 5 years). He can avail the loan only after completion of one year of FD. If he takes loan then he will have to repay the loan within the next 4 years, before the maturity of the fixed deposits.

Loan against FD vs Breaking the FD

The natural question here one will ask is, why not break the FD itself and use the money? Why one should apply for the loan??? Let us see the difference between the both and then one can take the decision.

You can see in the table above, all points favour breaking of Fixed deposits, but one reason why you can think of taking the loan against FD is-

The human tendency, that you repay the loan in EMI form easily rather than again creating the FD. If you break the FD and use the money, there is no compulsion for you to again save money and create the FD and it might happen that you will not have wealth at later point.

However, if you take a loan against FD, then the FD exists and you will look at the loan repayment as your primary objective and forced to pay back the money.

One more reason of taking loan against FD is, IF you are asked for a financial help by some relative or friend and if you choose to get loan for them against the FD. Then, they will be more serious in repayment of EMI because then they will be knowing it well that you have facilitate them a loan which has to be repaid on time. So, it will become obligatory for them to repay.

And in the same condition if you break FD and give the money as loan, its a transaction between you and your friend/relative and there is a tendency of all human beings to not return the money on time and become very casual about it, if it is not legal obligation over some one.

That was all about the loan against FD .. Do feel free to ask any doubts in the comment section.