Did you know that financial assets under management in our country today are over INR 200 Lakh Crore? These include life insurance, post office savings, provident and pension funds, equities and fixed deposits. However, when it comes to considering a loan, people choose to leverage their physical assets such as real estate or gold. It is interesting to note that very few people are aware of the fact that you can actually get a loan against financial assets too.
Fixed deposits (FDs) have long been a popular and trusted savings instrument for many Indian households and while these offer assured returns and are considered one of the safest investment options, they also come with a unique benefit that many people might not be aware of. When you need liquidity, rather than breaking your FD before it matures, you can take a loan against fixed deposits – your FD becomes the collateral and you can get the funds you need without having to liquidate the actual investment.
The most commonly asked questions about loans against fixed deposits
In an attempt to educate you on this topic, we have brought for you some of the most commonly asked questions and the answers as well.
Question 1 – What is a loan against fixed deposit?
A loan against a fixed deposit is a secured loan that is offered by banks and other financial institutions, where your FD acts as the collateral. Instead of breaking your FD prematurely, you can pledge it to the bank and take a loan against it, which is typically up to 90 percent of the FD value. This way, your FD continues to earn the prevailing interest and you get the funds that you need to meet any short-term financial needs, like medical emergencies, education expenses or business requirements.
Question 2 – What is the interest rate on loans against FDs?
One of the main advantages of loans against fixed deposits is that they come with lower interest rates compared to unsecured loans like personal loans. Typically, the interest rate on a loan against FD is around 1-2% higher than the interest rate offered on the FD itself. For example, if your bank offers a 6% annual interest rate on your FD, the interest rate for the loan against that FD will likely be between 8-9%. However, rates may vary by bank and depending on factors like the FD tenure and the bank’s policies, so it's always a good idea to check with the specific financial institution.
Question 3 – How do I know if I am eligible for this loan?
Eligibility for a loan against a fixed deposit is relatively straightforward especially when compared to other loan types. Most banks and financial institutions in India offer this facility to individuals, HUFs (Hindu Undivided Families), and even businesses, provided they have an active fixed deposit account with the bank. In addition to this, you might require a minimum FD balance and there should be no history of default.
Question 4 – What is the amount one can borrow?
The loan amount depends on the value of the FD; generally, banks offer loans ranging from 75% to 90% of the FD amount, but this percentage can vary from bank to bank. If you choose to take a loan against insurance policy, you could get up to 90% of the surrender value.
Question 5 – What are the required documents?
The process of obtaining a loan against FD involves minimal paperwork, given that you need to apply via the bank where your fixed deposit is held. Since the bank already has your KYC details and the FD is used as collateral, there’s no need for extensive verification or documentation. You might be asked to fill an application and post that your loan should be processed quickly .
Question 6 - Will my CIBIL score affect the loan?
Unlike personal loans or home loans, your credit score or history does not really impact the approval of a loan against FD. Since the loan is secured by your fixed deposit, banks are less concerned about your credit profile and more focused on the value of the FD itself. So, even if you have a low credit score, you should be able to get a loan. Same is also the case when taking a loan against life insurance; here too, your credit score is not a requirement.
Question 7 – What is the tenure of the loan?
The loan tenure for loans against fixed deposits generally matches the maturity date of the FD. So, for example, if your FD has a remaining tenure of two years, your loan repayment period will also be for two years; but some banks might allow you a more flexible repayment schedule.
Question 8 – What are my options for loan repayment?
When you take a loan against your fixed deposit, you will most probably have two repayment options – one would be an EMI method, where both the principal and interest are paid back in monthly installments. The second one is a bullet payment, wherein, you repay the loan in full, including interest, at the end of the loan tenure.
Question 9 – Are there any prepayment charges?
Most banks do not charge any prepayment penalties, unlike personal loans.
If you save in life insurance policies rather than FDs, at Mera Kal, you can get a loan against your insurance policies.