FINANCE TIP OF THE DAY
Can you afford your loan?!
Know the quantity of loan you can afford. The banks may sanction loan based on your income but you should look at your monthly expenditure and see if you can afford the maximum that banks offer. As a thumb rule, remember not to let your credit exceed 40% of your income!
Evaluating personal loan against fixed deposits!
Fixed deposits in banks are one of the most preferred investments by risk averse Indians who also look forward to earn a higher interest rate as compared to the normal savings account in the bank. Now these fixed deposits have another wonderful benefit to offer the customers and that is the provision to take a personal loan against it in times of requirement. This a great idea for personal loan that actually comes at a much lower rate of interest as the bank gets the security of the fixed deposit against which it provides the loan.
Key benefits of Personal Loans against Fixed Deposits
The reason for the growing popularity of this option as against traditional unsecured personal loans is the host of added benefits that come with such a loan.
- The interest rates available for personal loans against fixed deposits are lesser than conventional personal loans. The rates for such loans are generally 1 to 2% higher than the rates being paid by the bank for the fixed deposit.
- Such a loan does not require one to liquidate the FD which in that case lesser interest for being broken midway. This way the asset remains while the immediate financial requirements are met.
- The tenure for the personal loans against fixed deposits normally extends up to the maturity of the fixed deposits.
- The processing is also hassle free as the bank where you already have the fixed deposit will itself provide the personal loan against it.
- There is no prepayment penalties associated with these kinds of loans which gives the borrower the freedom to repay whenever his cash flow situation improves.
The Procedure for Personal Loans against Fixed Deposits
The process involved in availing a personal loan against fixed deposits is relatively simple and fast. In this case the fixed deposit will have to be hypothecated to the bank. At the time of the application the following documents will have to be submitted to the bank.
- Demand Promissory Note
- Pledge/lien Letter
- Loan Documents
- Overdraft Agreement
- Application Form
- Deposit Receipt
- Signed Receipt
There is a small processing fees that will be charged by the bank for the approval of this loan and the loan will be sanctioned in a very small time frame.
However one must carefully analyze the actual losses that will be accrued by taking a loan against the fixed deposit at an early stage of the deposit as compared to taking it against a deposit that is nearing maturity. In most cases it is preferable to take loan against deposits that are closer to maturity as the amount due will be more in this case. But at the same time one must understand that the tenure available for repayment reduces in this case. Weighing the pros and cons of both the situations the borrower will have to decide for himself which is the most advantageous situation for him. However in all cases taking a personal loan against fixed deposit is always better than a high interest rate pure personal loan.