Whenever we have a lump sum in hand, this is the financial product that most of us think of. Fixed deposit is one of the most popular financial instruments known to us. The ease of investment in this product, its guaranteed returns, flexibility and so many other features make it a favourite among the people.
When an emergency arises, we look for loans from various sources. Did you even think of loan from a fixed deposit? Yes, you can avail of a loan from your fixed deposit. How does it work and what are the conditions? Let’s explore this.
How is it given?
Loan against fixed deposit is given in the form of an overdraft against your deposited amount. This is an alternative given to you instead of breaking the deposit prematurely.
How much loan is allowed?
Most of the banks allow a loan in the range of 70-90% of the deposit amount. Some banks even offer more than this range. There is no standard on the amount of loan that can be sanctioned. It varies from bank to bank and also upon the amount deposited.
Interest rate on the loan
Interest rate charged on the loan given on a fixed deposit is usually 2-2.5% above the interest paid by the bank on the deposit. Once again, it varies from bank to bank.
Most of the banks do not levy any kind of processing fees unlike home and personal loans. Some of the banks may charge low fees for the loan.
Tenure and payment procedure
The maximum loan tenure offered for loan against fixed deposit is the term of the deposit itself. Payment procedure can be like a home loan where you pay EMI’s on a regular basis or as decided by the lender.
Foreclosure of the loan
Banks usually do not levy any penalty in case of foreclosure on the loan against fixed deposit.
Loan against fixed deposit is a great option for those looking to avail a loan at a better rate when compared to person loans where interest rates range from 14-30% p.a. Moreover, you will continue to earn interest on the deposit though you have availed a loan against it. Remember that you cannot close or break the fixed deposit after availing the loan on account of ‘right to lien’ clause of the banks. Also, there will not be any kind of tax benefits or deductions for interest paid on this loan.