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However, besides providing steady returns and fostering financial discipline, loans against FDs can be a source of financial support in times of need. This option does not require you to break your FD prematurely, thus saving you from unnecessary penalties. Loans against FD allows you to meet urgent expenses while keeping your investment intact. Let’s understand how these loans work and how they can be an ideal option to access funds.

What is a loan against FD?

Loans against fixed deposits are secured loans provided as overdrafts against our FD account balance. The process is straightforward and requires minimal paperwork. Banks may only ask for your FD documents and a completed loan application form. Most importantly, your FD continues to accrue interest, ensuring you don’t lose out on earnings.

Loan amount

Banks generally offer loans up to 75-90% of your fixed deposit’s value but the minimum and maximum loan amount offered can vary by bank. For instance, a leading public sector bank offers loans ranging from ₹5,000 to ₹5 crore.

Interest Rate

Interest rates for loans against FDs are typically lower than those for personal or car loans. However, with the Reserve Bank of India keeping the repo rates steady, FD rates have seen a spike in the past few years. For loans against FDs, banks usually charge 1-2% above your FD rate. For example, if your FD earns 6%, the loan interest rate might be 7-8%. Many banks also calculate interest on the daily reducing balance. For instance, if your FD yields 6% and the loan rate is 8%, on a ₹2 lakh loan, the annual interest would approximately be ₹16,000. It is, thus, wise to compare this cost with alternatives like personal loans or credit cards.

Repayment period

The repayment tenure for these loans typically extends up to 5 years or equal to your FD’s remaining tenure, whichever is shorter. The loan tenure, however, cannot exceed the FD term. Some banks also allow prepayments on such loans without penalties. It is recommended that you review the terms and conditions of the loan before opting for it.

Why are loans against FDs better than breaking your FD?

Prematurely withdrawing an FD often results in penalties and interest loss. For example, withdrawing an FD worth ₹5 lakh prematurely might reduce your interest rate by 1%. On a 6% FD, this could mean losing ₹5,000 annually. Opting for a loan against the FD keeps the FD investment intact, ensuring it earns its full potential while addressing immediate financial needs.

Key factors to consider

A loan against an FD can be a lifesaver during emergencies like sudden medical expenses, education fees, or home renovation. However, there are some important factors you should remember before availing of tis loan.

Understand the terms: Check the borrowing limit, tenure, and repayment options for the loan. Remember, defaulting can lead to your FD being liquidated. Once pledged, your FD will continue to earn interest, but you won’t be allowed to close or withdraw from it until the loan is fully repaid.

FD tenure: Loans are only granted for the FD’s remaining term, subject to a maximum tenure of up to 5 years. You should avoid borrowing against FDs nearing maturity to prevent higher EMIs. Longer-tenure FDs are more suitable for such loans.

Joint accounts: If the FD is jointly held, all account holders must sign the loan agreement and share repayment responsibility.

Using your FD for a loan encourages financial discipline. Instead of liquidating your FD for impulsive spending, it compels you to use the funds judiciously.

Adhil Shetty, CEO, BankBazaar.com