When faced with financial emergencies or cash shortages, obtaining quick and reliable funding is crucial. A practical option is to take a loan against a fixed deposit (FD). Using your FD as collateral, you can secure a loan without affecting your investment's growth.

Understanding a Loan Against Fixed Deposit (FD)

A loan against FD is a secured loan where your fixed deposit serves as security. The loan amount is typically between 90% to 95% of the FD's value, allowing you to access funds while maintaining your investment.

Eligibility for Loans Against FD

• Individual FD Holders: Both individual and joint holders can apply.
• Minors and Tax-Saving FD Investors: Minors and tax-saving FD investors are generally not eligible.

Advantages of a Loan Against FD

• Lower Interest Rates: Interest rates are usually 0.5% to 2% above the FD rate.
• No Premature Withdrawal: Keep your FD intact while accessing needed funds.
• No Processing Fees: Typically, no fees are charged for this loan type.
• Flexible Options: Available against both domestic and NRI FDs.
• Repayment Flexibility: Choose lump sum or installment repayments.

The Role of Collateral in FD Loans

Your bank retains the FD as collateral, securing the loan and enabling a lower interest rate. In case of default, the bank can recover from the FD at maturity, making it a low-risk option for lenders.

Credit Cards Against FD: Is it Better?

FDs offer liquidity, tax benefits, and the option to secure a credit card. This type of credit card usually offers 75% to 85% of the FD limit. Paisabazaar and SBM Bank (India) Ltd. offer the Step Up Credit Card with up to 90% of the FD credit.

Loan Limits from Major Banks

• SBI: Up to 90%
• ICICI, Citibank, Punjab National Bank: Up to 90%
• Bank of Baroda: Up to 95%
• Axis Bank, Kotak Mahindra Bank: Up to 85%
• HDFC Bank: Minimum Rs. 25,000
• Canara Bank: Up to 90%
• Yes Bank: Up to 90%

Note that 5-year tax-saving FDs don't qualify for loans.

Understanding Overdraft Facility on FD

This facility allows borrowing against FD while interest is charged on the used amount rather than the full limit, offering more flexibility.

Steps for Applying for a Loan Against FD

1. Check Eligibility: Ensure FD qualifies; minors and tax-saving FDs usually don't.
2. Visit the Bank: Request loan details.
3. Submit Application: Provide completed form and ID proof.
4. Approval and Disbursement: After approval, funds are quickly released.

Benefits and Downsides of Using FD for Loans

Benefits: Avoid liquidating savings, lower interest, and flexible repayment schedule.
Drawbacks: Loan is limited to FD amount, interest accrues, and default can cause losing FD.

Comparing FD Loans with Other Options

Personal loans offer high interest without collateral. Gold loans need gold as collateral. Credit card loans can be convenient but have high rates.

Conclusion

Loans against FDs are a smart way to handle financial emergencies without liquidating investments. With favorable rates and quick processing, they're ideal for emergency funding. Always assess terms to select the best fit for your situation.