Loan against fixed deposits: Things you should keep in mind

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There has been a surge in the demand for loans from banks pledging gold jewellery. Loans against fixed deposits can also be taken from banks.

One can get overdrafts against FDs too. Overdraft and loan against FD are two options for borrowing money against fixed deposits.

The fixed deposit-backed overdraft cap is lower than the deposit amount, but the interest paid is higher than the applicable FD rate.

No withdrawal

 You don’t have to withdraw money or break the FD. It remains as it is. It is merely pledged to the bank. A maximum of 90-95% of the amount in an FD is given as loan.

Anyone with a savings account, regardless of salary or credit score, can apply for a loan against their FD.

90-95% cap

In overdraft facility, a person can get maximum 90% of his/her FD limit. If the person has an FD of Rs 1 lakh, then the person can get a maximum of Rs 90,000 as OD. And the interest rate is levied on the amount the person gets as loan Rs 90,000.

To qualify for the loan, one does not need to have a good credit score. Loans against fixed deposits have a lower interest rate and carry no processing fee.

Tax-saving

A depositor with a 5-year tax saving fixed deposit cannot apply for a loan against his or her FD. Any normal FD is eligible for applying a loan or OD.

When an individual takes a loan against a fixed deposit, the bank uses the FD as collateral. If a fixed deposit holder defaults, the bank generally possess the fixed deposit.

FD with corporates

Banks are given an automatic claim on the fixed deposit against which the loan is processed. An FD with a company is also eligible for loan or OD.

For loan against FD, banks usually charge 2%-3% more than the FD rate. However, the largest lender of the country State Bank of India charges 1% above the specific FD rate against which loan, or OD, is issued. If your FD pays 5.5% interest, you may have to pay up to 7%-7.5% interest on the loan amount (in other banks).

After three months

After three months of opening a fixed deposit, a loan or OD can be taken by the person. But the loan amount will not cross 75% of the FD amount. If you take a loan after 12 months of opening the FD, then as much as 90% can be sanctioned by the bank itself.