Loan Against Fixed Deposit for Urgent Needs: Things to know

Updated on: 19 Jan 2024 // 4 min read // Personal Loans
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Over the last few years, various new investment avenues have opened up, offering investors the potential to earn better returns on their investments. But one investment avenue has stood the test of time and has always been the preferred option for risk-averse investors. So much so that even aggressive investors make sure that this avenue is represented in their investment portfolio? Wondering which investment option we are talking about? Well, the option being discussed here is Fixed Deposit, also known as Term Deposit.

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Apart from offering risk-free returns and liquidity, Fixed Deposits are readily accepted by financial institutions as collateral. You need not liquidate your investment to Apply for Loan Against Fixed Deposit. It indeed is an easy and hasslefree way to borrow for urgent short term requirements like cash crunch owing to Coronavirus pandemic or other emergencies.

Loan Against Fixed deposits in 8 points

Before you contact your banker to avail of Loan Against Fixed Deposit, there are a few points you should know about procuring a Secured Loans against Term Deposits.

Easy application and Instant approvals: In case of a financial emergency, availing a Loan Against Fixed Deposit is much quicker as compared to any other credit facility, including Personal Loan. As you already have a relationship with the bank, all your details are readily available to the bank. This ensures quick processing of the loan application. As the bank issues the Fixed Deposit certificate after blocking the said amount, the risk of default is minimal. Thus, the lender will be able to provide instant approval and disburse the amount within a few hours itself.

Multiple modes of disbursal: You can avail of a Loan Against Fixed Deposit in multiple ways. The most popular option is to avail the facility in the form of a term loan wherein the entire amount is sanctioned and disbursed at the same time. This option is suitable only when you require the entire amount altogether. But the lesser-known and more beneficial mode is to avail an Overdraft against Fixed Deposit. Herein, you are free to use the amount as per your discretion and need to pay interest only on the amount utilized. This will reduce your interest cost significantly. You can also opt for a dropline overdraft wherein the bank will deduct a certain amount from the overdraft every month and reduce the outstanding amount gradually over the period.

No EMIs: When it comes to Loan Against Fixed Deposit, most banks do not share a fixed repayment schedule or EMI schedule. You are free to repay the amount as per your convenience, but the interest liability will be calculated against the balance outstanding at the end of the day. So, while the bank may not pester you for the EMIs, you ought to repay the amount as soon as possible to reduce your interest liability.

Must avail from the same bank: You must note that you can avail of a Loan Against Fixed Deposit from the same bank with whom you have FD with. The bank will create a lien against the Fixed Deposit and endorse the lien on the back of the fixed deposit receipt. The lien will be cancelled only when the entire dues have been repaid. This rule is followed to ensure the safety of the bank’s money as; otherwise, someone might try to misrepresent the Fixed Deposit receipt as stolen and then claim the money from the issuing bank, leaving the lending bank vulnerable.

Online management: Most banks will link your loan account with your Savings Bank Account. This enables you to access the Loan Against Fixed Deposit account from internet banking, thereby allowing you to make the repayments, get account statements or other documents without any need to visit the bank. In many cases, if you have created Fixed Deposit online, you can apply for the loan from internet banking.

Maximum loan amount: The maximum loan amount available as Loan Against Fixed Deposit varies according to the bank, much like Personal Loans. Generally, banks offer up to 90% of the amount of the deposit as a loan and keep the remaining amount as margin money. For instance, if you apply for an SBI Personal Loan, the maximum amount available is 24 times the Net Monthly Income of the applicant or Rs. 20 Lakhs. But if you apply for a Loan Against Fixed Deposit with SBI, the maximum amount available is 90% of the value of the deposit with a capping of Rs. 5 crores. Under no circumstances will the bank offer you a loan amount more than the actual amount of the Term Deposit.

Negotiate the interest rate: It is important for you to negotiate the interest rate with the manager of the branch, as they usually have discretionary power here. Usually, banks charge up to 2% above the Fixed Deposit Interest Rate on a loan against the deposit. But some customers with a good relationship with the bank can get the loan at 1% above the deposit rate. So, a little bit of negotiations can save you a significant sum of money.

Interest accrual: While the bank will create a lien against the fixed deposit, you will continue to earn interest against the Fixed Deposit. The amount will be automatically added to your Fixed Deposit amount, and you will earn compounded interest accordingly.

Also Read: Borrower’s Guide: What All Types of Loans are Available in India?

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