Personal Loan Against Fixed Deposit: All You Wanted to Know

Liquidity management is an important aspect of personal financial planning. Even individuals with good investment portfolios often find it difficult to manage liquidity. A sudden requirement of cash can force you into selling your assets – sometimes at a discount to fair value.

However, if smartly used, traditional bank fixed deposits can come to rescue. Lenders offer personal loans against fixed deposits, whereby one can raise short-term money without breaking a fixed deposit (FD). Another advantage the borrower enjoys is the low interest rate as compared to other personal loans.

Why go for personal loan against FD?

Most banks offer personal loans at a rate of interest ranging between 16 per cent and 24 per cent.

A personal loan taken against a fixed deposit ensures that you pay just 1 per cent more than the rate of interest payable than the fixed deposit.

For example, if a bank pays a 9 per cent rate of interest on a three-year FD, then the rate of interest payable on the personal loan raised against it would be 10 per cent.

This saves a lot of money which otherwise would have been paid as interest had it been a traditional personal loan backed by no security.

A personal loan against FD is easy to obtain and the process generally takes less than one day. The individual has to submit a duly-filled application form, fixed deposit receipts and other documents such as pledge/lien letter and overdraft agreement as notified by the bank.

There is no prepayment penalty charged by the bank on the repayment of personal loans against FD. However, banks do charge a small processing fee while giving this loan. But if you have a long standing relationship with your bank, the lender may choose to waive half the fees.

Amount/interest

Banks generally offer 90 per cent of the value of the fixed deposit. For example, if you set up an FD with your bank just a month ago, the lender would be offering you a personal loan to the extent of 90 per cent of the amount you invested.

If the fixed deposit has already run for two years, then the bank would be comfortable lending you a bit more money than the amount you invested, as some interest is accrued on it in the past two years. The amount of loan offered against a fixed deposit would be closer to 90 per cent of the value of the fixed deposit.

If the borrower fails to service the loan, the bank has the right to foreclose the fixed deposit to recover the money lent. This also means that the tenure of the personal loan given against the FD cannot exceed the residual tenure of the fixed deposit.

Banks offer overdraft facility against bank fixed deposit. This enables borrowers to have access to liquidity. The borrower can use funds for a short period of time and repay the money much before the last date. This way the borrower pays interest only for the time he/she has availed cash from the bank.

For example, let us say an individual has an FD of Rs 1 lakh. The bank has approved a credit limit of Rs 90,000 against the FD and the tenure is 15 months. Now, if the borrower draws Rs 50,000 on the first of the month and then repays the money on the 17th of that month, then he/she is supposed to pay the interest on Rs 50,000 availed for 17 days only.

Remember

Two important things to note while taking a loan against FD is that it should be free from lien or encumbrance and the deposit should not be in any minors name. If this deposit is in joint name – say husband and wife, all holders of the deposit have to execute the loan documents.

The liability to repay the loan will lie with all holders of the deposit. The deposit holder will continue to receive interest on the underlying deposit. However, they need to service the EMI on the loan against deposit.

Conclusion

Personal loan against fixed deposit can help you in times of liquidity crunch. However, you should be looking at it as a means to raise short-term money. If you go overboard with a personal loan against FD and cannot repay on time, you stand to lose your bank fixed deposit as the bank forecloses the fixed deposit to recover the money lent.

Also, it shows in your credit report, popularly known as CIBIL report. Such default can pull your CIBIL score down. So use the facility of raising personal loan against bank fixed deposit responsibly.

Disclaimer: All information in this article has been provided by Creditvidya.com and NDTV Profit is not responsible for the accuracy and completeness of the same.