Personal Loan Against Fixed Deposit

Bank fixed deposits are one of the most common savings scheme open to an average investor. Fixed deposits also give a higher rate of interest than a savings bank account.  The facilities vary from bank to bank. Some of the facilities offered by banks are overdraft (loan) facility on the amount deposited (or loan against fixed deposits), premature withdrawal before maturity period (which involves a loss of interest) etc.

Why is the interest on personal loan higher than home loan?

Currently the interest rate on most of the personal loans is being charged between 18% and 25%, while the floating rate on home loans is around 12%. The difference is due to the greater amount of risk in a personal loan as compared to a home loan. If due to any reason the borrower decides to default in the repayment of a personal loan the bank has to face problem as it does not have taken any collateral or security, i.e. it does not have anything to sell off and reclaim the amount loaned out. Thus the higher amount of risk is reflected in the higher interest rates being charged on personal loans. So, individuals who repay the personal loan effectively end up paying for those who don't.

Why take loan against fixed deposit?

On the other hand interest on home loans are charged less than personal loans as the banks can always sell the house bought with the home loan and reclaim the amount still to be paid. One of the easiest ways to get personal loan at lower interest rates is loan against a fixed deposit.  This provides the bank with collateral or security and an option of liquidating the fixed deposit in case the borrower defaults. Thus the interest rates charged on such loans are usually a few percentage points higher than the interest rates of the fixed deposits. Usually banks advance up to 90% of the fixed deposit being held in a loan.

Why taking a personal loan against fixed deposit better than breaking the fixed deposit?

So in case you have a fixed deposit lying with you and you are not going to use it in recent future for meeting a personal need, you can use it to get a loan from a bank. If you need money urgently and for a short time, you may take a loan against your fixed deposit instead of liquidating it and bearing penalty charges. Interest rates on such loans generally are 1% or 2% higher than the interest you receive on your fixed deposit. If you liquidate the deposit to meet your short term financial needs, the bank will rework your interest for the actual period for which you have kept the deposit (on the least rate) and not the original higher rate of interest at which you kept the deposit.

Therefore, depending on the point at which you are about to take a decision, you need to work out the best option. Besides, aspects such as tax on interest earned and whether the interest paid on loan taken can be set off against other income has to be reckoned. Is the tax that you are paying on the interest received from the fixed deposit lower compared to the tax saving arising from the interest on the loan?

 Movement of deposit interest rates for different tenures is also relevant. Generally it is advisable to take a loan when the deposit has run for a longer period. If the need is earlier it is advisable to break the deposit.

What are the other collaterals against which loan can be taken?

Mostly all loans taken against collaterals always can turn out to be cheaper than personal loans. The key is to provide something as collateral against the loan. You can take such loans by tendering life insurance policies, National Savings Certificate, RBI Bonds, gold jewellery, bank fixed deposits, shares and debentures. Some of the banks even accept mutual funds as security.

What are processing fees and paperwork needed?

The processing fees charged for loans against security (fixed deposits etc.) are also low as compared with those on a personal loan. Sometimes if the deposit is with the institution you are borrowing from they will waive the processing fee. The paperwork most likely will be limited to a single page and since the loan is cash secured the lender may or may not even care if you have the cash flow to repay it

What is the tenure of loan taken against fixed deposits?

There is no specific tenure of the loan i.e. you can hold the loan till the maturity of your Fixed Deposit. In case the loan is not repaid till maturity then the same is adjusted against your fixed deposit proceeds. There are no prepayment penalties to foreclose the loan. You may prepay the loan at any time.

What are the documents required?
The loan is given against security of the fixed deposit. The fixed deposit shall be hypothecated to the bank. Hypothecation means that the borrower retains legal ownership of the property but provides the lender with a lien over the property until the debt is paid off. A lien is a legal claim by one person on the property of another as security for payment of a debt.

The following documents would be required.

• Demand Promissory Note
• Deposit Receipt
• Loan Documents
• Pledge/lien Letter
• Overdraft Agreement
• Signed Receipt
• Application Form