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Using Your FD to Get a Loan? Here's All You Need to Consider

By Chanel Rick - Sep 23,2022
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What is the Senior Citizen benefit in fixed deposits?

“Hey! What superpower do you wish for?”

“Invisibility!”

“Super strength!”

“Flying, like superman!”

On asking the same to a financial expert, they probably would respond with, “the ability to see the future!”. Why? Because nobody can really foresee a sudden financial emergency! And, without these superpowers, your finances could come tumbling down.  

Most articles on personal finances preach the importance of saving, putting aside funds for an emergency corpus, etc. However, certain financial constraints make that option invalid for some people. Some people earn modest incomes that offer limited choices between savings and investments. For those investors, it’s ideal to invest their money into easy-to-liquidate investment instruments. But is it really feasible?  

After saving for months or years, you finally start investing in fixed deposits and mutual funds. And for what? The bitter reality comes down to liquidating those assets and perhaps even incur the additional expense of penalties. Though, that doesn’t necessary need to be the case for you.  

Redeeming investments aren’t the only way to secure funds for financial obligations. There’s an option for investors to pledge their investments for a loan instead! You might have heard about gold loans; they’re a common way of availing cashflow during emergencies. Although, that option won’t suffice if you own limited quantities of gold or they have lower karatages. Or don’t own any at all.  

If you don’t own any gold investments, don’t be disheartened! There are other similar avenues that allow investors to avail loans. One such way is pledging your fixed deposit for a secure loan. Are you surprised? The humble fixed deposit has come to the rescue! Learn more about how these loans work and some factors to bear in mind before applying for them.  

Loan Against Fixed Deposit  

This type of loan is a viable option for investors with a short-term financial impediment that requires quick financing. Loan against fixed deposit is a secured loan that allows borrowers to pledge their invested funds as collateral for the loan. Though, the loan depends on the amount invested into the fixed deposit. Based on the lender’s policies, the amount sanctioned can go up to 90-95% of the deposited amount.  

Moreover, there are two fixed deposit loans – an upfront loan or an overdraft. If the borrower opts for an overdraft, the bank will issue a limit based on the value of the fixed deposit. 

Example:  

Mr. Aarif has encountered a sudden expense, and he’s looking for ways to secure quick funds. Fortunately, he has a fixed deposit with ₹10 lakhs invested into it. Instead of withdrawing the investment, he opts for a loan against the fixed deposit. After approaching a bank, he informs them that he needs an overdraft against the fixed deposit. So, the bank approves an OD of up to ₹9 lakhs.  

Since his requirement is only for ₹5 lakhs, he only takes a loan on the necessary amount. Until the amount borrowed is repaid, he must continue to pay the interest and make timely repayments.  

As a traditional investment instrument for investors with low-risk appetites, a fixed deposit can serve multiple purposes. So, why not use it to fulfil temporary expenses? You don’t need to liquidate those funds and incur penalty charges. Moreover, as an investor, you can continue to reap the benefits of compounded interest and tax benefits for owning a fixed deposit.  

While contemplating the potential benefits or consequences of approaching this mode of securing funds, learn who is eligible for these loans. The option of loan against fixed deposit is available for all investors, including individual and joint account holders. However, the following types of fixed deposits are excluded from facility.  

  • Fixed Deposits in the name of minors  
  • Tax-Saver Fixed Deposits  

Things Borrowers Must Know  

Diving head-first into the unknown is not the way to deal with financial products like loans. Without analysing the advantages and disadvantages, you might make a costly mistake. So, before applying for a loan against a fixed deposit, consider some factors.  

Repayment Before Maturity  

While taking out such loans, the lenders will offer repayment options like instalments or fixed lump-sum payments. It will give borrowers some convenience to repay the loaned amount based on their repayment capacity. However, there is a pre-condition that requires borrowers to repay the loan before the fixed deposit matures. 

Comparatively Low Interest  

Unlike personal loans that levy hefty interest rates, a loan against a fixed deposit charges lower interest rates. As per regulations, the interest rates on fixed deposit-based loans are lower by 2-2.5% than market interest rates on loans. The rate of interest charged on these loans is slightly higher than the fixed deposit rate. It usually varies from 2% to 5%, but it could be lower depending on the lender. 

Fixed Deposit Collateral  

In case of default on loan repayment, the bank will claim the pledged fixed deposit. When the borrowers fails to repay the amount, the bank will simply procure it directly from the fixed deposit pledged as collateral.  

Minimal Paperwork  

Since this is a secured type of loan, with the fixed deposit acting as security, the paperwork required is minimal. Borrowers aren’t required to submit documents like employment certificates, salary slips, IT returns, etc. Unless requested for certain papers, the fixed deposit serves as an adequate collateral.  

CIBIL Score Checks  

The eligibility criteria for these loans don’t consider the borrowers credit history or CIBIL score. It facilitates those with poor credit scores to avail the necessary funds without further conditions. Borrowers must adhere to the other eligibility requirements to qualify for the loan.  

Loan against fixed deposits are available for Indian residents and NRI deposit holders as well! Moreover, HUF, family trusts, societies and companies can avail these loans, too. So, what are you waiting for? Avoid the clutches of financial constraints with a speedy loan from Bajaj Markets today!  

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