Fixed Deposits (FDs) are among the most sought-after and safest saving devices in India. They generate regular returns with very little risk entailed, a delight with risk-averse investors. But little is known to depositors that their fixed deposit can also serve as a readily available source of money if any financial needs arise—without the FD being prematurely encashed. The facility is loan against FD.
This article describes what is loan against fixed deposit and highlights five major advantages of taking this facility, e.g., how this is superior to other borrowing sources and what loan against FD interest rate would be anticipated.
What is a loan against fixed deposit?
A loan against FD is an option to borrow a loan by using your fixed deposit as collateral for the bank. Rather than withdrawing the FD amount before maturity, you keep it as collateral for a short loan or overdraft. Your money remains with the bank and they give a loan, typically 90–95 percent of the FD amount, based on the policy of the bank.
This kind of loan works best in cases where you would like to have the cash at hand immediately without wanting to forego the interest advantage of your FD or need to pay premature withdrawal charges.
1. You do not have to encash your FD
The best benefit of a loan against FD is that it does not force you to break your fixed deposit investment. Breaking an FD normally means giving up a lower interest payment and penalty. In this loan, your FD keeps growing interest at the negotiated rate, and you receive money without ruining your savings.
It is a perfect choice for individuals who have maintained their FD amount for long-term purposes like education, marriage, or retirement but need cash for some unplanned expenses today.
2. Lower interest rates compared to unsecured loans
The most ideal advantage of a loan against FD is the interest rate. As the loan is being availed on your deposit, banks also provide a loan against FD rate of interest at best up to 1.5 to 2 percent above the FD rate. This is very minimal when compared to personal loans or credit card loans, which range from 15 to 20 percent.
For instance, if your FD attracts a return of 7.5 percent, the loan will most likely be advanced at a rate of about 9 to 9.5 percent—much less than unsecured loans.
3. Fast approval and less paperwork
The other major benefit is the speed and ease of the process. Because the bank has your FD set aside, it does not require lengthy background checks or verification of income. The paperwork is light, and in most instances, particularly if you are already a bank client, the loan is approved virtually immediately.
Few banks now provide facility of net banking or mobile app so that you can apply, get sanctioned, and get disbursed without going to a branch.
4. Simple repayment options
Loans against FDs typically have flexibility in repayment. You may repay the loan either by paying the entire amount or by instalments, as you prefer. Demand loan and overdraft facilities against FDs are offered by most banks, so you may opt for a convenient structure according to your liquidity.
Additionally, you only pay interest on the borrowed amount and for the period you use it. Since the loan against FD interest rate is applied only on the used amount, this makes it cost-effective for short-term needs.
5. No effect on credit score
As the loan is secured against your own FD, lenders consider it a low-risk credit. Banks will never report such a loan to credit bureaus in case of default in repayment. That means that your credit score remains unaffected, as long as the loan is repaid in time.
This aspect makes loan against FD most attractive to those who do not wish to have hard inquiries or are establishing or developing a good credit record.
Who is eligible to apply for loan against FD?
The facility is generally granted to:
- Individual holders of deposits
- Joint holders of an account (on a mutual consent basis)
- Minors (through guardian)
- Senior citizens
- Companies or firms with an FD
You would look to see that your FD is not in some other’s name or under tax-saving scheme (such as 5-year tax saver FD), as these generally cannot be used for loans.
Loan against FD vs premature withdrawal
| Characteristic | Loan Against FD | Premature Withdrawal |
| Accruing interest | Ongoing at the FD rate | Less due to penalty |
| Processing time required | Same day or instant approval | Instant |
| Interest rate on loan | 1.5–2% over FD rate | Not applicable |
| Effect on long-term goal | No | Yes |
| Tax benefit (if any) | Intact | Can be lost |
Things to keep in mind
Loan tenure
Usually matches the remaining term of your FD. If your FD matures in six months, your loan will have the same tenure. Banks do not extend the loan beyond the FD’s maturity date.
Loan amount
Generally 90–95 percent of the FD value. The exact percentage may vary depending on the bank’s policy and the type of fixed deposit held.
Processing fees
These are low or zero for existing customers. Banks can waive the fees as part of customer value programs, especially for online or pre-approved loans.
Default risk
In the case of default by the borrower, the bank can prematurely close the FD and collect the outstanding dues with interest.
Conclusion
Loan against fixed deposit is a wise, risk-less, and affordable means of fulfilling short-term funding requirements without disturbing your long-term corpus. By offering high loan against FD interest rate, low documentation, and rapid processing, it surpasses expensive unsecured loans or withdrawal of FD before time.
Whether it is a medical crisis, education, business, or some other unexpected expense that requires money, taking loan against your FD through this facility keeps you monetarily equipped while still earning interest on your deposit. If you already possess an FD and require cash, opt for this option in preference to others.
