Loan against fixed deposit: loan amount, interest rate, term; All you need to know
Many people in India still prefer to invest their money in fixed deposits (FD). The term deposit is considered to be one of the most popular financial instruments and the attraction for FD is due to the safe and secure nature of the investment. This investment offers guaranteed returns, flexibility and various other features as it comes with a wide range of tenures. You can choose between 7 days and 10 years.
In an emergency, it also gives you the option of taking out a loan against your FD instead of breaking the investment. An investor can benefit from a loan from his fixed deposit. Experts suggest that borrowers can opt for a loan against FD when looking for a loan at a better rate compared to personal loans. The interest rate on personal loans typically ranges from 14 to 30 percent per year. In addition, the borrower continues to earn interest on the deposit even after using a loan against it.
If you also need instant cash, find out how it works and things to keep in mind when choosing one:
What is that?
The loan against fixed deposit is an alternative offered to the investor instead of breaking the deposit prematurely. This loan is granted in the form of an overdraft on the amount deposited by the investor.
Amount of the loan
Typically, banks allow around 70 to 90 percent of the deposit amount while sanctioning a loan on FD. There is no set standard on the loan amount which can be sanctioned hence some banks also offer even more than that. Normally this varies from bank to bank and depending on the amount deposited.
For a Fixed Deposit loan, the interest rate charged is typically about 2 to 2.5 percent higher than the interest paid by the bank on the deposit. The interest rate, however, varies from bank to bank.
Unlike home and personal loans, banks generally do not charge any type of processing fee on loans against term deposits. Although some banks charge a low fee for the loan.
The term of the deposit itself is the maximum loan term offered for a loan against a fixed deposit. The procedure for paying loans on FD is similar to home loans, where the borrower pays the IMEs on a regular basis or as decided by the lender.
Usually, banks do not levy any penalty for foreclosure of the loan against FD.