In a tight spot, bank on your FD : Business Line

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A loan against your FD carries lower interest rates than a personal loan and comes without processing fees

Personal loans are not the only way to meet your short-term financial needs. If you have been conscientious and put away money in fixed deposits (FDs) periodically, consider a loan against your FD. Here’s why.

Lower rates

The biggest benefit is that a loan against FDs comes at a much cheaper rate than a personal loan. Usually, banks charge an interest rate between 2-3 per cent over-and-above the FD’s interest rate. If you take a personal loan, the interest rate can even cross 20 per cent.

With the highest bank FD interest currently at 9.3 to 9.4 per cent, your FD loan rates will be cheaper by a mile.

For example, ICICI Bank and HDFC Bank offer a maximum of 9 per cent interest on their FDs. Axis Bank offers 9.2 per cent. So, in these cases, your interest rate on the loan against FDs could be capped at 12-12.2 per cent.

On personal loans, ICICI Bank charges 13.5-18 per cent, while HDFC Bank charges 15.75-20 per cent. And at Axis Bank, the interest rate can vary between 15.5 per cent and a high of 24 per cent.

The nitty-gritty

The quantum of loan that can be availed on an FD varies across banks, usually at 70-95 per cent of the principal and the interest accrued on your FD.

For example, public sector banks such as the State Bank of India and Canara Bank offer up to 90 per cent. On the other hand, HDFC Bank offers only up to 75 per cent of the deposit value.

It doesn’t matter what type of FD it is; you can get a loan against FDs of any tenure. You can even get a loan against a tax-saving deposit. The only criterion, in some cases, is that the FD should have completed and earned interest for at least three months.

It’s not just banks you can turn to for such loans. Non-banking financial companies (NBFCs) also offer loans against FDs. But with NBFCs, the quantum of loan offered is on the lower side compared to a bank.

Most NBFCs offer only up to 75 per cent of the present value of your FD. For example, Dewan Housing Finance offers 75 per cent of the value as loan amount. In the case of Mahindra Finance, it can start from 60 per cent and go up to a maximum of 75 per cent.

Payments

While a personal loan is given for a fixed tenure, there is no fixed period for loans against FD. In general, the period of your FD is the maximum tenor offered for these loans.

That is, if you have invested in a five-year deposit and are taking a loan at the end of the second year, the remaining three years will be the maximum period that would be available for you to repay the loan.

The mode of repayment is decided mutually between you and the bank at the time of taking the loan. You can either pay it back as equated monthly instalments, or the entire loan amount plus the interest can be deducted once the FD matures. Any remaining amount left in the deposit after such deduction will be paid back to you.

Then there’s Mahindra Finance, which has other options. One, you can pay just the interest on the loan every month and the entire principal would be deducted once the FD matures. Or you can opt for a payout after deducting both the principal and the interest amount at the time of maturity.

There is no pre-payment penalty either. Your FD will continue to earn interest during your loan period as well.

Pros and cons

While you have your choice of banks to get a personal loan at the best rate, for a loan against an FD, you are restricted to the bank or NBFC in which you have the deposit.

The drawback of a loan against FD is that the amount of loan you can take is capped.

And if your bank requires a higher margin, your loan amount will be reduced to that extent. If you have invested small amounts in multiple FDs across banks and need a big amount as loan, then approaching all these banks is a hassle.

However, the loan sanctioning process is simpler as all your details are already with the bank. This is the main reason why most banks do not charge any processing fee. Personal loans have a processing fee.

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