When confronted with a sudden financial crisis, the majority of us liquidate our assets, such as fixed deposits. While this manoeuvre might easily help you get through a bad day, it also takes precedence over the goal of your investment. So, what's a better option than liquidating your FD? Using it as collateral and getting a fast loan!
There are no processing fees with this form of loan, and you may pay it back in monthly instalments or in one big sum. The interest rates on these loans are likewise quite competitive, and they are greater than the interest rates on fixed deposits. You may continue to receive regular returns on your deposit as long as your investment is intact!
You can now take out a loan against your FD in one of two ways:
Take out a standard loan.
Consider an overdraft (OD) account.
However, before you proceed, keep the following factors in mind.
1. Qualification for a loan
One of the first things to evaluate is whether or not you qualify for the financial product. Anyone with a fixed deposit, whether alone or jointly, is eligible for this loan. Your job title, monthly pay, and credit history are all secondary considerations that are only taken into account if you ask for an overdraft. However, if the deposit is in the name of a juvenile or was made for tax purposes, it will not be eligible for the loan.
2. Borrowing restrictions
A credit limit is set for loans secured by fixed deposits. The quantity of money you may borrow is directly proportional to the amount of money you have in your account. Banks often lend just 90 percent to 95 percent of the amount of the FD.
In the meanwhile, the overdraft lending facility normally has a loan amount ceiling of roughly 90%. What is the mechanism behind this? Assume you have Rs. 5 lakhs in your fixed deposit account. In this situation, your bank may provide you a maximum overdraft limit of Rs. 45,000, and you will not be able to withdraw more than this amount. Besides, you'll only be charged interest on the money you take out of your account.
3. Lien on the fixed deposit
Loans against fixed deposits, like any other type of loan, come with a fee. Your bank will create a lien on the deposit if you use it to support a loan. Following that, your bank will receive an automated claim on the deposited funds until the loan term is completed. Because of the lien, the loan is also secured and comes with a reduced fixed deposit interest rate.
If you default on your loan instalments, the bank will seize the cash from your FD. However, after you have paid off the obligation in full, the lien will be immediately eliminated.
4. The length of the loan
Finally, the loan term should be taken into consideration. This is due to the fact that a loan against an FD does not have a distinct term. The maximum loan term is equal to the term of your savings account.
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