A fixed deposit, or FD, is one of the most popular savings schemes in India. It provides the investor with a guaranteed return on investment, making it a trustworthy source of income. However, a fixed deposit also ties up the investor’s funds for a fixed duration. If the investor has an emergency or requires liquidity, then he or she may have to prematurely withdraw funds from the fixed deposit, which may attract penalties. To address this issue, financial institutions offer loans against FDs. This is a form of secured loan where the investor pledges the FD as collateral, and the financial institution provides a loan against it. In this article, we explore the advantages of choosing a loan against FD over other options.
Advantages of Loan Against FD
Lower Interest Rates
A loan against FD is a secured loan, meaning that there is no risk for the lender. In the event of default, the financial institution can recover the loan amount by liquidating the FD. This makes loan against FD less risky for the lender, and hence, there is typically a lower interest rate charged on these loans. In contrast, an unsecured loan such as a personal loan attracts a higher interest rate as the risk for the lender is higher.
Immediate Liquidity
If you require funds for an emergency, then a loan against FD is an excellent option. Since the FD is pledged as collateral, the financial institution can immediately assess the value of the FD and provide you with a loan amount. There is no need for complex documentation or credit checks, making loan against FDs a hassle-free option.
No Need to Break the FD
When you take a loan against an FD, you are essentially borrowing against the money that is already invested. This means that there is no need to break the FD prematurely, and you can continue to earn interest on the FD. Breaking an FD prematurely can result in penalties and lower returns, making it a less attractive option.
Lower Processing Fee
A loan against FD typically attracts a lower processing fee than other types of loans. This is because the financial institution does not need to conduct a credit check or assess the borrower’s financial history. The loan is secured against the FD, and the processing fee is minimal.
Flexible Repayment Terms
When you take a loan against FD, you can choose the repayment terms that suit your needs. You can opt for a shorter or longer repayment period depending on your financial situation. The loan against fd interest rate is also fixed, which means that you can plan your repayment accordingly. This flexibility makes loan against FDs a popular choice for those who require immediate liquidity.
Tax Benefits
When you take a loan against an FD, the interest charged on the loan is tax-deductible. This means that you can claim a deduction on the interest paid on the loan in your income tax returns. However, it is essential to note that the original investment in the FD does not attract any tax benefits.
To summarize, a loan against FD is an excellent option for those who require immediate liquidity. The advantages of loan against FD are lower interest rates, immediate liquidity, no need to break the FD prematurely, lower processing fee, flexible repayment terms, and tax benefits. However, it is essential to consider the disadvantages of loan against FD such as the potential loss of interest income and the possibility of losing the FD if the loan is not repaid. Additionally, it is crucial to choose a financial institution that offers competitive interest rates, processing fee, and flexible repayment terms.
Industry’s Standard Practices
In the financial services industry, loan against FDs is a standard practice offered by banks and non-banking financial companies (NBFCs). The loan amount offered typically ranges from 70% to 90% of the FD value, depending on the financial institution. The interest rate on loan against FDs is usually lower than personal loans and other unsecured loans. The repayment period can range from a few months to several years, and the interest rate is fixed for the entire repayment period. The financial institution retains the right to liquidate the FD in case of default by the borrower.
Conclusion
Loan against FD is a popular option for those who require immediate liquidity while enjoying the benefits of a fixed deposit. It offers lower interest rates, immediate liquidity, flexible repayment terms, and tax benefits. However, it is essential to consider the disadvantages and choose a financial institution that offers competitive interest rates and processing fee.
