During a cash crunch or emergency, people tend to look for loans from a lot of sources. One of those sources can be getting loans against fixed deposits (FD) from banks. This is a time-efficient way of getting a short-term loan. Instead of breaking the FD prematurely, depositors can easily apply for a personal loan with the bank.
FD used as Collateral
While taking a loan against FD, banks keep the FD as collateral or security. This kind of loan is suitable for people who have a damaged credit score or those who do not meet the eligibility criteria and are unable to get a personal loan from the bank.
The loan is given as an overdraft on the FD amount.
What is an overdraft?
Overdrafts are different from demand loans. An overdraft is a facility given by the bank where the customer can withdraw a certain amount of money from their account. This amount is limited and based on various factors including the customer’s income profile, credit score and eligibility pre-fixed by the bank on the basis of payment history. The overdraft credit limit is subject to change from time-to-time according to an individual’s credit score, among other things. It is a benefit given to businesses or individuals against FDs or other securities.
The interest paid on overdrafts is usually higher than interest paid on demand loans and the interest is paid only on the amount that is being withdrawn and not on the entire OD limit. For a loan, interest is charged on the entire sum borrowed. There is no fixed duration for an overdraft. Interest is paid as long as the customer holds the money.
Amount of loan granted against FD
Banks grant a percentage of the FD amount as loan. This can range anywhere between 70 to 95 percent of the total FD value. For instance, SBI has set this limit at 90 percent of the FD value. So, if one has Rs. 10 lakh invested in an FD with SBI and wants a loan, the loan amount would be Rs. 9 lakh.
Lower Interest Rates on loan against fixed deposit
Interest rates on loans taken against FDs are comparatively lower in comparison with other traditional loans but higher than interest rates on FDs. Usually the interest rate on a loan against FD is around 1 to 3 percent higher than the interest rate of the FD. This rate differs from bank to bank. It should be noted that tenure of the loan against FD cannot be more than the tenure of the FD itself.
[Note: Loan against Fixed deposit cannot be issued against FDs in a minor’s name]
For instance, SBI’s interest rate for loan against FD is 1 percent above its FD interest rate. This means that if interest rate of an FD is 6.80 percent (tenure – 1 year to less than 2 years) then the interest rate on a loan given against this FD would be 7.80 percent. This is much lower when we compare it with SBI’s loan interest rates which start from 12.50 percent.
Repayment of loan against Fixed deposit
Banks offer flexible repayment plans with the only condition that the loan tenure cannot exceed the duration of the FD. One can choose to repay the loan as a lump sum or even in installments.
Loan Limit in Major Banks
The following table gives the loan limit as a percentage of total FD value for some major banks in the country:
|State Bank of India||Up to 90 percent|
|ICICI Bank||Up to 90 percent|
|Bank of Baroda||Up to 95 percent|
|Axis Bank||Up to 85 percent|
|HDFC Bank||Up to 90 percent|
|Citibank||Up to 90 percent|
|Union Bank of India||Up to 90 percent|
|Yes Bank||Up to 90 percent|
Benefits of getting loan against fixed deposit:
- Lower interest rates
- Minimal documentation
- Do not need to break FD
- Can be availed on domestic and NRI FDs as well
- No processing fees
Features of loan against fixed deposit:
|Eligibility||All FD holders (single or joint holders), except minors|
|Loan Amount||In the range of 70 to 95 percent of total FD value|
|Tenure||Cannot exceed FD tenure|
|Loan Interest Rate||1 to 3 percent (could be higher in some cases)|
|Documentation||Minimal documentation as the FD exists with the bank issuing the loan|
It should be noted that banks do not offer the benefit of loans against FD for five year tax-saver FDs