Loan against Fixed Deposits

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When you invest in a bank fixed deposit, you can easily get a loan against it without having to break it. This is similar to a personal loan. However, the loan is structured as an overdraft facility against your fixed deposits. Among various ways to raise short term debt, a loan against your existing fixed deposit might just be one of the quickest.

FD is one of the most popular types of investment options in India because it offers numerous advantages. Many banks in India offer loans against FDs including State Bank of India (SBI), HDFC Bank, ICICI Bank and Axis Bank, among other banks. Loans can be obtained on both domestic and NRI FDs. If you are looking for a loan to meet some financial emergency consider taking one using your FD and avail multiple benefits such as lesser interest rate, waiver on processing fee, among other benefits.

There is no specific tenure; you can avail of the loan till the deposit matures. If unpaid till maturity, the loan is adjusted against the fixed deposit proceeds. There are no prepayment penalties to foreclose the loan. There is no restriction on the end use of funds. It can be used to meet financial requirements, business, and direct investment in India or for buying property.

If the deposit has a longer unexpired maturity and before maturity, intermittent inflow of funds for crediting  to loan account expected , the existing  deposit bears a higher interest rate which cannot be got if deposited afresh , availing loan on deposit (fixed or reinvestment deposit, both called as  term deposit) is advisable.

The loss of interest suffered compared to original contract rate if deposit prematurely closed, income tax liability if any arising on deposit interest received during loan period if loan taken etc. must be taken into acct before deciding premature closure of deposit vs. taking loan on that deposit.

For example, deposit gets 7.5% interest and tax slab 30.90%, net rate earned is only 7.5 less 2.3175=5.1825% only but loan interest will be 9.5% taking 2 % above deposit interest and loan interest  compounded monthly.(Deposit interest got by quarterly compounding).Premature closure may sometimes prove advantageous than taking loan.

Loan on deposit as O.D. granted on request but many banks charge transaction charges or higher rate of interest when compared to one time disbursal under loan on term deposit.

Benefits of Loan against Fixed Deposit

  • There is no need to break the FD
  • Can be availed on domestic and NRI FDs as well
  • A loan against a fixed deposit will be much cheaper than a personal loan.
  • You can expect process to be quick. Since the bank owns the deposit, it merely needs to mark a lien on the fixed deposit to create security.
  • Such loans against fixed deposits may not have any pre-closure charges.
  • There may not be any other charges apart from interest rate. So, you won’t have to incur any processing fees etc.
  • Depending upon terms of the credit facility, you may be required to pay only the interest amount (and not principal like in EMI based repayment schedule). You may get the liberty to make principal repayment as and when your cash flows permit.

Interest Rates

Interest will be charged on the amount drawn and not the limit set. It is around 2 to 2.5 per cent over the fixed deposit rate. Axis Bank charges 2% above the deposit rate whereas SBI charges 1% over the deposit rate.

Processing Fee

The processing fee charged for this loan is low compared to Personal Loans. Sometimes, banks waive off the processing fee. As this is a secured loan, the lender may or may not want to know if you have the cash flow to repay it.

What is the Loan Tenor?

The loan tenor cannot exceed tenor of the deposit. The bank may have additional internal restrictions on loan tenor. For instance, at SBI, the tenor cannot exceed 5 years.

How much can be Borrowed?

You can either borrow against the entire deposit amount or according to your requirement. Banks offer a loan anywhere between 75 and 90 per cent of the deposit after maintaining a 10-25 per cent margin. The latter may vary with each bank and every customer. For instance, if you have a fixed deposit of Rs 5 lakh, you can borrow up to 90 per cent of the deposit amount with a margin of 10 per cent.

Repayment Schedule

Repayment schedule (or method) can vary across banks. You must verify the repayment method before taking the loan. It depends on the type of credit facility too. If it is taken as a demand loan, then you may have an EMI like repayment schedule. With overdraft facility, you may get credit line on renewable basis. i.e., your borrowing limit gets reinstated once you repay. You merely need to keep paying interest. If you do not repay within specified period or before FD maturity, your FD maturity amount will be used to square off the loan.

Tax Benefits

Salaried individuals cannot get tax benefits on the interest paid on loans against fixed deposits. Self-employed individuals using the funds for the purpose of business can deduct the interest paid as a business expense from their business income and pay tax on the remaining amount only.