How Loan Against FD Works? Discover the Mechanism Here!

408 3 minutes read

During financial emergencies, people often find themselves in need of quick and convenient financing solutions. One such solution is taking out a loan against your fixed deposits, a source that can provide much-needed relief. This method allows you to obtain a short-term loan from financial institutions without the need to prematurely break your fixed deposit. This article will guide you through the mechanism of a loan against FD and the benefits it offers, helping to alleviate some of the stress associated with financial emergencies.

Table of Contents

Loan Against Fixed Deposit (FD)

Financial instruments called fixed deposits allow you to invest for the long term with the guarantee of a profit. Compared to traditional savings accounts, they provide more alluring rewards. Like any other loan, the loan against FD is issued to the borrower all at once and is repaid by the borrower in equal monthly installments.

The amount of the FD deposit determines the loan amount, which might be up to 90%, depending on the deposit amount. A fixed deposit held by a customer may be used as collateral for a secured loan, such as one received against it.

Many lenders’ fixed deposits require a minimum opening amount. With these lenders, you can rest easy, knowing that an existing deposit won’t be changed, even if the market fluctuates. A loan against FD has the following advantages: security, flexibility, and assured savings returns.

Loan against a fixed deposit: Mechanism

A loan secured by a fixed deposit operates in the same way as any other type of loan. After receiving a lump sum payment, the borrower makes equal monthly installment payments (EMIs).

This kind of loan, however, is secured by putting your fixed deposit as collateral, in contrast to unsecured personal loans. Here’s where the Loan-to-Value (LTV) ratio comes into play, letting you figure out how much of your investment you can actually borrow.

Who Is Eligible to Apply for an FD Loan?

The prerequisite for being eligible for a loan against FD is having a fixed deposit with the bank or other financial institution. However, you have to match one of the following additionally:

Clubs, groups, and associations

Sole proprietorships, partnership firms, and group enterprises

family trusts

Indian residents

Check the following list to check whether you qualify to apply for a loan against fixed deposits:

This kind of loan isn’t available to owners of 5-year tax-saving FD accounts.

A minor’s name on an FD is not eligible.

Holders of solo and combined fixed deposit accounts

Features and advantages

A loan against your FD account has several advantages. Below are the characteristics and advantages of a loan against FD.

No early payment penalties

Prepayment is the opportunity to pay off a debt in full before the specified due date; however, costs could be associated with this. If you take out a loan against FD, there won’t be any prepayment penalties. Additionally, you can still earn interest on your loan against your FD.

Little to No Documentation

Since the bank you are requesting the loan from already has your information, issuing the loan is simple. The application for a loan secured by a fixed deposit must be submitted with your identity documents and fixed deposit receipts.

Lower Interest Rate

These loans have a lower interest rate when an FD acts as their collateral. In general, personal loans have higher interest rates than FD interest rates. As a consequence, loan EMIs are lowered.

No Credit Score Inquiries

When you apply for a loan, banks often check your credit history. On the other hand, a loan secured by an FD mainly helps those with poor credit ratings because it does not rely on your credit score to establish your eligibility.