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Loan against Fixed Deposits

What is a Fixed/Term Deposit?

A fixed deposit is a product offered by banks to help you earn higher rate of interest on your money than a regular savings account. It is differs from savings account that pay you a fixed rate of interest on your savings normally lesser than 6% in India with the bank. Unlike savings account here you will be enjoying more interest at the same time there are certain terms that are involved in breaking the deposit , as the Term indicates it is for FIXED TENURE unless you keep the amount for the agreed period you may not get the interest offered by the bank at times you may not get interest also (if the deposit losed before 7/14 days which is the period the deposit has to run minimum as per bank's norms ). You cannot withdraw them prior to maturity. But with advanced notification to bank and paying a penalty fee, you can withdraw your fixed deposits. You can invest in fixed deposits for varying tenures at different interest rates, and earn added benefits on your savings.

Loan against Term deposits:

Many banks in India offer loan against fixed deposit accounts. This helps you fulfill your financial requirements by providing funds up 90% of the value of your fixed deposit. Loan against fixed deposit is granted as demand loans or overdraft against deposits. Many top ranking private and public sector banks in India such as SBI, Axis Bank, ICICI Bank and HDFC Bank etc. offer loan against FDs.

Types of loans:

  1. Demand Loan : Payable on demand, normally maturity date is till deposit period. NO debits allowed after initial disbursement
  2. Overdraft: valid for 1-3 years depends upon bank. normally a limit is set for an value between 75-90% upon your request and the account can be operated just like a cash Credit account where you can deposit money/cheques to reduce your interest.

Loan against NRI FDs:

Likewise, banks like SBI, Axis bank, HDFC Bank and ICICI Bank etc. also provide loan against fixed deposits to non-resident individuals (NRIs). NRIs can invest in NRI fixed deposits through their NRE, NRO and FCNR account and get demand loan or overdraft against their fixed deposit accounts. For example, HDFC Bank offers loan against fixed deposits up to 90% of the value of your NRE fixed deposits. Axis bank offers up to 85% of the value of your NRE fixed deposits opened with it. Loans against NRI fixed deposits can be taken in Indian rupees as well as foreign currency.

Benefits of taking a loan against FD:

  • It helps in liquidity management. 
  • Loan taken against your fixed deposit account can help you get short term money for any kind of financial requirements without breaking your FDs. 
  • It also saves you from selling your assets at discounted value to fulfill your monetary needs.
  • The most important advantage of taking a loan against fixed deposit is that you can get a loan at comparative and lower rates of interest than other personal loans as they are unsecured loans. Loans against FDs are secured loans with the underlying deposit in your FD account.
  • Banks in India offer maximum loan up to 90% of the value of your fixed deposit.
  • You can access the loan amount with cheque book, ATM and internet banking with banks like Axis Bank. Loans against fixed deposits can be taken for any tenure as long as it does not exceeds the tenure of your fixed deposits. Loans are available to self and third party individuals including corporate organizations. 
  • SBI has started offering Loan against deposit at 1% more than deposit rate online. You can get deposit loan in just a min.

How to apply for a loan against FD?

First, you need to fill a loan application form by putting all the required information. Along with the loan application form, you need to attach your fixed deposit receipt received from the bank. Upon receiving these documents, the bank will grant a loan against your fixed deposit.

Normally a lien letter for keeping the deposit under bank Lien is obtained.

Repayment of loans against FD/STDR/TDR/TD

Bank may offer you a flexible repayment plan. You may be allowed to repay your loan in instalments or lump sum. Also, banks may allow preferred customers to borrow up to a particular limit and repay when cash is available.

Key Points:

  1. Banks grant loans only against deposits which are free from lien and restraint. Also, they don’t grant loan against fixed deposit opened in the name of a minor.
  2. If the deposit against which a personal loan is taken was opened jointly, all holders of the account will have to sign the loan documents. The responsibility of repayment will have to be borne by all the holders of the deposit account.
  3. The deposit holder will keep on receiving interest on the underlying deposit. However, he/she needs to make the repayment towards the loan either in EMIs or lump sum.
  4. If a borrower fails to repay the loan taken against his/her fixed deposit account, bank has the right to close the fixed deposit account to recover its debt. Banks don’t allow the term of loan granted against fixed deposits exceed the remaining tenure of a fixed deposit.

Redrafted from BankBazaar article

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