Disadvantages of Loan Against Fixed Deposit (FD)

Fixed deposit (FD) is an investment option with assured returns, making it a popular way of investing for many individuals with a low-risk appetite.

Almost all public sector and private sector banks offer FD accounts. Furthermore, many banks allow their existing customers to open FD accounts instantly through their net banking facility, making fixed deposits one of the most accessible investment instruments.

Most banks offer loans against FD accounts. It means that in times of financial difficulties, you can avail a loan against your FD instead of prematurely withdrawing it. A loan against an FD usually has a lower interest rate and is accessible to anyone, regardless of their credit score.

However, the question remains, does taking out a loan against FD always make more sense than withdrawing it all together? While there certainly are some advantages of availing a loan against an FD (some of them mentioned above), in this article, we are going to discuss the key disadvantages of taking  a loan against a fixed deposit.

Also Read: Credit Card Against FD: Features, Eligibility and More

What is Loan Against FD?

A loan against fixed deposits is a type of secured loan where the bank uses your fixed deposit as collateral to sanction the loan. It means that your FD balance determines the loan amount. Generally, banks approve loans up to 90 to 95% of the FD amount. A loan against FD is an alternative to premature withdrawal of your FD.

Eligibility

• Any FD account holder, including individual holders with a joint account, can avail of a loan against a fixed deposit.
• 5-year tax-saving fixed deposits cannot be pledged as collateral for a loan.
• FD accounts opened in the name of minors cannot be pledged as collateral to secure a loan.

Benefits

• You can apply for a loan against the fixed deposit account regardless of your credit score. Banks typically offer 90 to 95% of the FD amount as a loan.
• Interest rates for loans against FD are lower than other type of loans, like personal loans, credit card loans, etc. Depending on the bank, it can be anywhere between 0.5% to 2% higher than the interest rate that you get on FDs.
• NRIs are also eligible to apply for loans on their NRE/NRO FDs.
• For most banks, there are no processing fees involved.
• It may require little to no paperwork. Additionally, some banks offer online loan applications through their net banking services.
• You can pay your loan back in instalments or as a lump sum. However, the repayment has to be made within the FD tenure. (This type of loan does not have a separate term, it follows the same tenure as your FD.)

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

Disadvantages of Loan Against FD

While a loan against a fixed deposit allows you to meet short-term financial needs without premature withdrawal, it still has the following disadvantages.

• Since you are using your fixed deposits as the collateral for your loan, if you do not repay, the bank can enforce the foreclosure of your FD account to recover the loan amount. It means not repaying the loan can lead to the loss of FD investments, including the interest income.
• This type of loan does not have a separate tenure. It shares the same duration as your fixed deposit account.
  Therefore, if the maturity date of your FD account is nine months, the maximum tenure of the loan can be nine months.
• Taking a loan against fixed deposits is not always the best option, especially when you are unsure about your ability to repay it. Also, defaulting on the FD loan can harm your credit score. In some instances, paying the penalty for premature withdrawal would be better than not being able to repay the loan amount on time.

Also Read: Know About Loans Against Mutual Funds

Interest Rate on Loan Against FD

Listed below are the interest rates on loans against FD offered by some of the prominent banks in the country. We have also mentioned the premature withdrawal penalty to help you make an informed decision.

Also Read: Premature Fixed Deposit Withdrawal

Final Thoughts

FDs are one of the most preferred investment options for many, and loans against fixed deposit accounts are convenient since banks typically sanction them regardless of the account holder’s income, profession, and credit score.

Since this is a secured loan against your fixed deposit, banks usually charge lower interest rates than other types of loans. However, obtaining a loan against fixed deposits isn’t always a good idea, especially if you can’t repay the loan within the same term as your FD. So, decide based on the loan interest rate, FD tenure, FD early withdrawal penalty, and repayment capacity.

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