How To Take A Loan Against Your Bank Fixed Deposit   May 24, 2018


Loan Against Your Bank FD

A bank Fixed Deposit (FD) as we all know is a secured way to generate wealth, particularly for conservative investors. It takes care of your liquidity needs, addresses short-term goals, and can even help you in tax planning (a 5-year Tax Saver bank FD).


[Read: Everything You Need To Know About Tax Planning]

But along with these attributes, a bank FD also stands as the last resort on a rainy day, when you are in dire need of funds. Yes, it helps in contingency planning!

Broadly, you have two options during an exigency: liquidate your bank FD, or take loan. If you choose the former, it can disrupt the path to wealth creation.

Hence, the latter, i.e. taking a loan against your bank FD (in the form of an overdraft) is a sensible thing to do because you continue to earn interest on the bank FD and get access to funds.

How much is the rate of interest?

the rate of interest
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The interest rate for loan against FD is comparatively lower than for personal (unsecured) loans –– to be precise, just 2.0% above the interest rate earned on your bank FD.

Note that interest is charged on actual amount utilised and for the tenure of utilisation. There are no Equated Monthly Instalments (EMIs) or post-dated cheques required as in the case of other loans.

How much can be the loan tenure?

can be the loan tenure
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Loan against bank fixed deposit is a secured loan, the collateral being the bank FD. Hence, regarding the tenure of the loan, it is not specific ––as long the bank FD is in force. And you have the flexibility to repay the loan during that time period.  

How to apply for loan against bank FD and the process?

loan against bank FD
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Approach your bank.

The documents required for loan against bank FD are:

  • Fixed deposit receipt of your bank
  • Duly signed loan agreement letter
  • Address proof
  • Identification proof
  • Passport size photograph/s

The aforesaid documents need to be accompanied by a duly filled and signed application form.

In case, you are availing a loan against bank FD from a financial institution or bank other than the one with which you have a fixed deposit, a cancelled cheque copy/s may also be needed. Every bank has its processes, whether you apply online or offline. 

Once you apply, the loan sanctioning is subject to a thorough assessment, as per the extant instructions and credit policy of the bank. The availability of margin and security will not be a substitute for the due diligence process.

Once the loan is sanctioned, your acceptance to the terms & conditions will be obtained on the sanction letter.

Note that the copy of the loan agreement along with all the enclosures quoted in the loan agreement will be furnished to you at the time of issue of the sanction letter. And the sanction letter will clearly indicate the credit facility extended to you.

The loan will be disbursed to you on compliance with all the terms & conditions.

Post-disbursement supervision such as submission of periodical reports and periodic inspection will be stipulated by the bank on the sanction letter. The sanction letter would also mention whether the bank or the borrower will bear the cost of inspection.

Once the loan is disbursed, if the bank decides to recall the advance/accelerate the payment or accelerate the performance under the loan agreement/or wishes to seek additional security, a notice in this regard shall be issued to you, the borrower.

Are there any prepayment charges for early loan closure?

charges for early loan
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No, unlike other loans there are no prepayment charges for early loan closure.

However, do note that unless the loan against bank FD is repaid in full, you, the borrower cannot prematurely close/encash the bank FD.  

Only on repayment of the loan in full, the bank shall release all the securities held.

Overall, here are the merits of opting for loan against bank fixed deposit:

  • Useful means of credit particularly when you do not have a credit history
  • The application process is hassle-free compared to other loans
  • Likewise, the approval and disbursement process is quick compared to other types of loan
  • The rate of interest is lower than for personal (unsecured) loans  
  • Interest is charged only on actual amount utilised and for the tenure of utilisation
  • No system of EMIs, you pay at your convenience as long as the bank FD is in force
  • There are no prepayment charges for loan against bank FD
  • Your other investments, assigned for other important financial goals, are left undisturbed
  • The path to wealth creation is uninterrupted

To sum up…

Managing contingency needs is an important part of personal finance, much as planning for defined financial goals. It is important to address liquidity needs, because uncertainties and exigencies do not come calling. 

[Read: A 3-Step Guide to Building A Liquid And Secure Emergency Fund]

Taking a loan against your asset during exigencies, in this case your bank FD, would prove sensible than liquidating or getting rid of your investments built over time, with hard-earned money, to address certain financial goals.

However make sure you borrow prudently, within your means and repay diligently and sooner, in the interest of your long-term financial wellbeing and credit worthiness.

[Read: Everything You Need To Know About Credit Score]

I recommend, get your financial health checkup done today and live a healthy & wealthy life.

financial health check today

Also, to plan for your long-term financial goals consider PersonalFN.

PersonalFN is a SEBI registered investment advisor. The fundamentals we firmly believe in are:

✔ Client first philosophy

✔ Confidentiality of your financial data

✔ Handhold you in the journey of wealth creation and accomplishing financial goals

✔ Provide unbiased recommendation backed by over a decade long research experience

✔ Disclose any kind of income we earn from recommendations

✔ Aim to establish a long-term relationship with you, not just a financial one

Schedule a call with PersonalFN's investment consultant, or drop a mail at info@personalfn.com, or call us on 022-61361200. We will be happy to help you!

To achieve your financial goals, there's no need to fight or struggle, if you have a comprehensive financial plan charted and are determined about achieving it.

Author: Rounaq Neroy



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Comments
bal.orange@rediffmail.com
May 29, 2018

Very very useful information for middle class and such information which I get in detail at first time though I had heard but not in detail.
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