One of the easiest and fastest methods to raise funds is to turn to fixed deposits you may have. You are able to borrow funds against a fixed deposit in any one of two ways. Either you can take a loan against your fixed deposit (FD), or request the bank for an overdraft.
What is FD?
Before you go any further and even consider a loan against an FD, you should be aware of what an FD is. If you already have one, you will know this. Nonetheless, you should be aware that a fixed deposit is a secure way of investing a fixed sum of money for a specific tenure (from 7 days to 10 years or more). You may pick the tenure for which you want your funds invested. Once your funds are invested in a fixed deposit, you will start to earn interest on these funds. Interest is paid out at regular periods, selected by you when you start the FD. You can also opt to have the interest paid out in a lump sum with your principal amount at the maturity of your fixed deposit.
Taking a Loan Against FD
If you opt for an overdraft to get funds quickly, the bank, or any other financial institution, will grant a loan limit based on the amount that is currently in your fixed deposit. For instance, if you have an FD amounting to Rs. 10 lakhs, you may get an overdraft facility to withdraw up to Rs. 9 lakhs worth of funds. There is no set duration for repayment when you avail of an overdraft. All the borrower has to pay is the interest on the money withdrawn. If you opt for the other way of a loan against your FD, this loan is like any other. You get funds at a single time and have to pay that amount back in equated monthly instalments. While this is a quick and effortless way to take a loan for an urgent need, without any unnecessary paperwork, you need to know about certain disadvantages of a loan taken against a fixed deposit.
Disadvantages of a Loan Against an FD
You should consider that a loan against FD facility given by banks is different from an overdraft facility. One important distinguishing factor is that interest charged on an amount of loan through an overdraft is typically more than that charged if you take a loan against an FD. Taking a loan against an FD is a good way to raise funds, provided certain conditions are met. This can only be an advantageous way of raising funds at short notice if you consider the disadvantages involved. These are listed below:
- Amount of the Loan – Depending on the bank or financial institution in which you have an FD, you get a loan sanction of an amount anywhere between 70%-95% of the total value of your fixed deposit. In case, your bank offers an amount at the lower end of the spectrum and you need more funds, this may not be a good idea for you.
- Rate of Interest – Once you know what is FD and the interest rate you get for returns on your FD, you can think of starting an FD with the potential to take a loan when you need it. However, if you take a loan against an FD, the bank will charge you an interest which is typically anywhere from 2%-2.5% more than the interest paid to you on your FD by the bank. This differs from bank to bank and maybe high for you.
- Tenure – With a loan taken against a fixed deposit, the tenure for repayment is the term of the FD. If you think you may fail to repay your loan within this period, you should avoid this loan.
Final Notes
A loan against a fixed deposit is a convenient way to raise funds for emergencies quickly, provided you can afford to repay loans within the tenure of your FD. Additionally, you should be able to pay the interest rates along with loan repayments.
