Fixed deposits (FDs) continue to be the favorite investment scheme for Indian investors seeking protection together with periodic returns. There could be instances, though, when you need money urgently without wishing to withdraw your FD prematurely. In such instances, a loan against FD is an easy as well as inexpensive borrowing facility. This article discusses how to utilize your fixed deposit by taking a loan against FD, benefits, steps, and key aspects such as rate of interest on loan against FD.

Understanding loan against FD

Loan against FD is a bank and financial institution secured loan against the collateral of your fixed deposit. Since FD is held as collateral, they are of low cost, quick sanction, and minimal documentation compared to unsecured loans. It enables you to mobilize funds without cashing in your investment and earning interest on your FD as well.

Advantages of taking a loan against FD

• Lower rate of interest: The rate of interest on loans against FD is typically 1-2% more than the rate of interest you receive on the FD, which is lower compared to a personal loan or credit card.

• Quick processing: Since the loan is collateralized, the approval procedure is just a day or two.

• FD benefits are not lost: The FD still earns interest even if you have availed a loan against it.

• Convenience in repayment: The loan repayment term may be made convenient at your choice. Repayment can be done either by lump sum or EMIs.

• No foreclosure charges: Foreclosure without paying any extra charge is commonly offered by all the banks.

• Tax benefit: As you are not utilizing the FD, the initial investment is still retained and tax-free.

Eligibility criteria of loan against FD

You should:

• Maintain a fixed deposit in the loaning bank or financial institution.

• The FD should be in your name or jointly held.

• The FD should be running and with a specific tenure (usually 3-6 months lapsed).

• Possess a good credit record, although minimal documentation is involved.

How much can you borrow against your fixed deposit

All lenders allow you to avail a loan of 75–90% of the FD value. The loan against FD interest rate may, however, change based on bank policy as well as the tenure of the FD. For example, if your FD value is Rs. 5 lakh, you can avail a loan of Rs. 3.75 lakh to Rs. 4.5 lakh.

Learning about loan against FD rate of interest and charges

Interest rate of FD loan is usually fixed at the interest rate you get for your fixed deposit. The banks will provide 1-2% more than the interest rate you get for FD. Suppose you get 6.5% a year on FD, the interest rate for loan can be between 7.5% and 8.5%.

Other determinants which determine interest rates are:

• Loan duration

• Relationship with the bank

• Credit history (though less important in this case than for loans without security)
  

Other fees can be:

• Processing fee between 0.25% and 1% of the loan

• Delay payment fine for EMI
  

Always compare FD vs loan rates in banks to avail best.

Procedure to take loan against FD

It is easy to take loan against FD. Do the following:

1. Check your FD eligibility: Verify that your FD qualifies to be collateralised by the lender.

2. Fill application: Fill in a loan application form online or at the bank branch.

3. Documents required: Typically comprises proof of identity, receipt of fixed deposit, proof of address, and bank statements.

4. Loan processing: Bank checks your FD and sanctions the loan.

5. Loan disbursal: The funds are credited in your account once approved, even in 24-48 hours sometimes.

Repayment terms and pre-payment options

Most loans against FD are offered with a flexible repayment period of 6 months to 36 months. You have the choice between EMIs or repayment of the entire amount ahead of time.

There is barely any foreclosure fee for such loans, and that makes it feasible for you to repay early under any change in your financial situation.

Why loan against FD better than breaking FD

Breaking fixed deposit attracts charges and interest return loss. A loan against FD allows you to release funds at comparatively lower cost without affecting the FD duration or amount.

The FD keeps earning interest in the regular course, giving you twin advantages — access to fund and continuous returns.

Comparison of other loans

While choosing a loan, the interest rate, speed of approval, tax benefits, and collateral needed should be compared. Here is the comparison of a loan against fixed deposit (FD) vs. personal loans and loans against property:

Type of Loan	Interest Rate Range	Collateral Needed	Speed of Approval	Tax Benefits
Loan against FD	7% – 9% approx	Yes (Fixed Deposit)	1 – 2 days	FD continues to earn interest
Personal loan	10% – 16% approx	No	3 – 7 days	None
Loan against property	8% – 12% approx	Yes (Property)	7 – 15 days	Yes (for home use)

The loan against FD is inexpensive and comes quickly, so it is an appropriate source of funds for short-term liquidity requirements. But the disbursed amount is usually restricted to 75%–90% of FD value. It also provides regular interest income, which is not feasible with most other loans.

Situation most appropriate to avail a loan against FD

• Unforeseen hospital bills

• Education fees

• Travel ticket funding

• Small business needs

• Short-term working capital shortfalls

Where larger capital requirements or longer tenors are involved, other credit facilities might be more appropriate, but for shorter-term liquid needs, this loan is the best option.

Things to remember before availing loan against FD

• Compare different lenders’ interest rates before making a decision.

• Look for processing fees or any hidden costs beforehand.

• Lend only according to your repayment ability.

• Consider how EMIs would affect your monthly spending budget.

• Verify if the FD is lien-marked to the lender in order to avoid availing a second loan from the same FD.

Conclusion

Loan against FD is an excellent financial option to utilize your fixed deposit without cashing it. It provides access to funds at minimal cost and in short duration while keeping your investment intact and earning interest. Knowledge of the loan against FD interest rate pattern aids in better financial planning and reducing the borrowing cost. For risk-free and hassle-free borrowing options, this type of loan should be thought of before resorting to unsecured credit for Indian investors. Properly planned utilization of your FD can provide liquidity for unplanned emergencies or short-term needs without disturbing your habitual savings routine.