What is loans against fixed deposits?

A loan against Fixed Deposits is precisely what the name implies; it is a loan obtained against the amount invested in a fixed deposit. Loans against fixed deposits can be a smarter option while availing loans, as these are easier to obtain and the interest rate for these loans is much lower than traditional loans.

Loans are traditionally obtained to meet emergency needs, which involve liquid cash. Breaking a fixed deposit might come to mind to meet this requirement but obtaining a loan against the fixed deposit makes more sense. Money invested will continue to fetch interest once the loan has been cleared and the interest paid on loan could be less than the overall interest earned at times.

Fixed Deposits are a popular investment choice and a majority of individuals keep their savings in such deposits. Most fixed deposit loans are given in the form of an overdraft against the deposited amount. This loan ensures that any emergency can be dealt with and the amount in the deposit remains as it is.

What are fixed deposits?

A fixed deposit refers to a sum of money invested in a bank or any other financial institution which offers the depositor a specific interest which is paid for the duration of the deposit. A fixed interest rate is given on the investment for a fixed period of time. Once the investment reaches maturity, both the principal amount and the interest are paid back to the investor. A Fixed Deposit account is one of the most favoured accounts, owing to the high rate of interest offered by banks and financial institutions.

A Fixed Deposit is generally used by both individuals and organisations to store liquid funds for a fixed period, which can then be used for any future needs. Fixed Deposits are considered a safe investment option and while the interest rate offered by them is on the lower side, they still offer decent returns on the investment. Fixed Deposits are often referred to as Term Deposits in many countries.

Interest rates on Fixed Deposits vary according to the term period, with longer term periods attracting better rates. Fixed Deposits can be opened for terms ranging from a minimum of 7 days to a maximum of 10 years.

How much loan can be availed against Fixed Deposits?

The loan amount which can be obtained against fixed deposits depends on the initial amount invested in them. A majority of banks which offer loans against fixed deposits provide loans upto 70-90% of the fixed deposit investment. This loan amount varies from bank to bank and certain banks are known to provide loans up to 95% of the investment, in cases where the initial investment is over Rs 50 lakh. Lower investments generally translate into lower loan amounts.

Loans over Rs.1 crore can be availed based on the investor’s relationship with the bank and there is generally no fixed upper limit on the loan amount, as it entirely depends on the money invested in the fixed deposit. Higher the fixed deposit amount, higher the loan in most cases.

The tenure of any loan obtained against fixed deposits depends on the tenure of the fixed deposit. The loan tenure cannot extend beyond the term of the fixed deposit and is available only for the remaining period up to maturity. For example, if a loan is availed against a fixed deposit of 5 years after 1 year, the individual has to repay the loan within the next 4 years, before the fixed deposit reaches maturity. In case of foreign currency loans, most banks provide it for a minimum period of one year and the maximum period to clear the loan is on maturity of the fixed deposit. The loan can be availed at any time during the fixed deposit tenure.

Features and Benefits of Loan against Fixed Deposits

An individual who chooses to avail a loan against fixed deposits has many advantages over conventional loans. Some of the major features and benefits are mentioned below.

• High Loan Amount – Individuals can get loan amounts up to 95% of the fixed deposit investment. This means higher the investment one has higher the loan they can get. Most banks sanction loans which are 80-90% of the invested amount and if the individual has a long history with the bank they can get higher amounts sanctioned.
• Hassle Free – Most banks offer loans against fixed deposits without much hassle. An individual is not required to fill out detailed forms or go through a strict process before getting the loan. The process is fast and simple.
• Low interest – The interest for loans availed against fixed deposits are comparatively lower than Interest rates for Personal Loans obtained by other means. The interest rate is generally 1-2% more than the interest rate an investor gets on his/her deposits. Interest is charged only on the amount utilized as loan and not the entire fixed deposit amount.
• Flexible Repayment – The loan amount can be paid in flexible terms, with no strict payment dates and terms.
• Liquidity – Loans obtained against fixed deposits offer instant liquidity in case of emergencies. These loans allow the individual to keep the fixed deposit secure and offer an alternative to breaking the fixed deposit to cater to urgent monetary needs.
• Low processing fee – Loan applicants are not subjected to high processing fee by banks and the loan can be availed for negligible processing fee. Applicants who are on good terms with the bank could also get the entire processing fee waived.
• No prepayment charges – Most banks do not charge a prepayment fee in case of early payment of loan.
• No foreclosure fee – A majority of the banks do not charge any penalty in case of foreclosure on loans obtained against fixed deposits.
• Payment only for utilisation – Loans against fixed deposits offer individuals the flexibility to pay for the loan only when they use it. They always have access to the available credit when they need it.

Purposes for which loan money can be used

• Personal Expenses – The loan amount can be used to pay for any personal expenses like home renovation, vehicle purchase, education bills, medical emergencies, wedding expenditure, and so forth.
• Property – The money can be used to purchase property in India.
• Business – The money can be used to meet business requirements such as purchasing assets, equity contribution or as working capital.

Purposes for which loan money cannot be used

A few banks mention certain restrictions on using loan money for certain purposes.

• Investment in Chit-funds - The loan money cannot be used to invest in chit-funds or similar companies.
• Investment in shares – Some banks do not allow the loan money to be used as an investment in shares or securities.
• Re-lending money – The money obtained as loan cannot be re-lent to other individuals.
• Agricultural Activities – A few banks restrict loan applicants from using the money for agricultural or plantation activities.

Eligibility criteria

• Applicant should have a fixed deposit account with the bank.
• Applicant should be at least 21 years old.
• Individual businesses which want to avail loan should be either sole proprietorship or partnership firms.
• Certain banks allow only private limited companies and stock brokers to avail this loan.
• The fixed deposit should not have reached maturity at time of applying for loan.
• Loan can be obtained only if the deposit is free from any restraint or encumbrance.
• Loan cannot be granted against fixed deposits which are held in the name of minors.
• Loan can be availed only against deposits held by members of the same household/family.
• Loan cannot be availed if the applicant has plans to close the deposit.

Documents required

• Filled up application form.
• Fixed Deposit details including receipts discharged in favour of the banks.
• A cancelled cheque might be required if loan is being taken from financial institutions other than banks.
• Duly signed agreement letter.
• Passport size photographs.
• Valid identity proof.

Interest rate and fees

The interest rate for loans against fixed deposits are comparatively lower than the rates charged for other types of loans. Banks generally charge an interest rate which is 2-2.5% higher than the interest rate being paid by the bank on the fixed deposit. This amount varies from bank to bank, with private banks generally charging a higher interest than nationalised banks.

For example, let us say that an individual customer has a fixed deposit which earns him interest at the rate of 10% per annum. If he/she wishes to avail a loan against this fixed deposit the bank will charge him/her an interest rate of 12 to 12.5%, depending on bank policies. This interest will be charged only for the period for which the loan is availed and not the entire term of the fixed deposit.

Banks generally charge a minimum processing fee, which can be a few hundred rupees to process the loan. This fee can be waived if the applicant is on good terms with the bank and has a good reputation. A few banks do not charge any processing fee or hidden charges and most banks do not charge pre-closure charges either.

Repayment

Banks offer customers different repayment options. There are generally no fixed repayment dates and a working relationship can be charted out between the bank and the loan applicant. Some banks insist on payment of interest on a monthly basis while some allow the interest to be paid at maturity. In cases where the interest plus loan amount exceeds the deposit the customer might be asked to repay part of the amount immediately.

Advantages over breaking the Fixed Deposit

Taking a loan against fixed deposits can be better than breaking the fixed deposit to meet demands. The first benefit is that one does not have to pay a penalty for premature withdrawal, which is generally about 1% of the rate.

The interest rate which is charged by banks for loans against fixed deposits is much lower than other rates. Banks generally charge a rate which is 2% higher than the interest being earned on the deposit. A loan availed at this rate might ultimately cost the applicant no money, with the interest earned being more than the interest paid.

Consider the following case where a man who has a fixed deposit of Rs 10 lakh for 2 years at an interest rate of 10% per annum. If he decides to take a loan of Rs 8 lakh for 1 year at an interest rate of 12% he ends up paying Rs 9600 as interest. The interest accumulated on the sum over the complete duration is Rs 11,000. Thus even after paying off the interest on the loan the man manages to earn Rs 1400 as interest.

FAQs

Yes, NRIs can avail loans against fixed deposits, if they satisfy certain conditions.

No, the interest earned on fixed deposits are not exempted from tax. The loan amount is subject to tax if it falls under the taxation bracket.

Certain banks state that the minimum loan which can be availed against fixed deposits should be Rs 25,000 and the maximum amount which can be availed is 95% of the deposit value. These numbers vary from bank to bank.

No, an interest is charged only for the period till the loan is cleared. No interest is charged on the amount once all dues are paid.

Banks do not give the entire deposit as loan amount and the amount which is left in the Fixed Deposit after processing the loan continues to earn interest even during the loan period.