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    Personal Loan against Fixed Deposit

    What would you if you are in need of quick cash but wary of rising bank lending rates? The typical knee jerk reaction would be to liquidate your assets to meet your immediate financial requirements. Think again. Experts suggest you would be better off take a loan against your fixed deposits instead of liquidating your high interest FD.

    Liquidating FD vs taking a loan against FD

    Most lenders will charge premature withdrawal penalties in case of liquidation of a fixed deposit. The penalty charged is usually 0.5 to 1% for the period the deposit is with the bank. In most cases, banks do not charge processing fees for personal loans taken against fixed deposits.

    Standalone personal loan vs personal loan against FD

    Personal loans have higher interest rates since they are unsecured as compared to personal loans taken against fixed deposits, which typically have lower interest rates, since they have the underlying deposit as the collateral. Getting a personal loan against a fixed deposit can be a good move in terms of your financial planning for the following reasons

    • Provides funds during a liquidity crunch for the short-term.
    • Cheaper than personal loan or credit card loan in that your fixed deposit continues to earn interest, while the loan only costs 100-200 bps or just 1-2% above your FD rate. (Government-owned banks usually charge 100-150 bps above the deposit rate while private banks charge 200 bps above the deposit rate)
    • Customers can avail of overdraft facility (withdraw more than the deposit) in many cases. All banks do not offer both loan and overdraft facilities. For instance, while ICICI Bank offers both facilities, ING Vysya Bank offers only the overdraft facility.
    • Many banks usually do not charge any processing charge since there is no risk involved.
    • In most cases, there are no prepayment penalties.
    Terms and conditions
    • Amount
    • Most banks usually offer 90 per cent of the value of your fixed deposit as the loan amount. For example, if you have a fixed deposit of Rs. 1 lakh with a bank for a tenure of two years, the bank would offer 90% of the amount as loan. The bank would lend you more money factoring in the interest accrued on your fixed deposit for two years. The loan can, therefore, be taken for any duration except that it should not exceed the tenure of the deposit.

    • Interest Rate
    • Most banks offer personal loans at an interest rate ranging from 16% to 24%. However, if you take a personal loan taken against a fixed deposit, you typically pay just 1% more than the rate of interest payable on the fixed deposit. For instance, if a bank charges 8% interest on a fixed deposit, the rate of interest payable on the personal loan raised against it would be 9%.

    • Documentation
    • A personal loan against fixed deposit involves simple documentation. You have to produce the following documents as notified by the bank

      • Demand promissory note
      • Deposit receipt
      • Loan documents
      • Pledge/lien letter
      • Overdraft agreement
      • Signed receipt
      • Application form
    • Charges
    • Most banks usually do not charge prepayment penalties for personal loans against fixed deposits. However, some banks do charge a small processing fee. Nevertheless, preferred customers, in some cases, may get half of their fees waived if their bank chooses to do so.

    • Repayment
    • Banks may offer a flexible repayment plan, wherein loan can be paid either in instalments or in a lump sum. Customers can also choose to repay a fixed amount every month. In some cases, banks ask customers to pay interest on a monthly basis. In many cases, customers can settle the loan at the time of the maturity of the fixed deposit.

      The borrowed amount plus interest should not exceed your deposit, failing which, you will have to repay the amount. Similarly, the tenure of the personal loan should not exceed the residual tenure of your fixed deposit.

      Customers who have a long standing relationship with their bank can avail of the overdraft facility which provides more liquidity for the short term. The customer pays interest only for the time he or she availed money from the bank.

      In case of a default, the bank may choose to foreclose the fixed deposit to recover the loan amount.

    Banks offering personal loans against fixed deposits
    • HDFC Bank
    • ICICI Bank
    • ING Vyasa Bank
    • Axis Bank
    • Citibank
    Points to Remember
    • Money should be free from lien or encumbrance
    • Deposit should not be in a minor's name.
    • If the deposit is under the joint name of both husband and wife, all holders of the deposit are liable to repay the loan.
    Financial Prudence

    Although taking a personal loan against your fixed deposit is easier compared to a standalone personal loan, tread with caution and don’t go overboard. If you don’t repay your loan on time, you will lose your fixed deposit (banks may foreclose the fixed deposit to recover the loan amount). Consequently, your CIBIL score will take a beating.

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