Fixed deposits (FDs) are a popular investment option in India, offering a secure and guaranteed return on investment. While FDs are primarily known for their stability, they also offer an additional feature: the ability to avail credit against them. This allows individuals to access funds secured by their FD without having to break the deposit prematurely, thereby preserving the accrued interest. In this comprehensive guide, we will delve deep into the intricacies of credit against fixed deposits, discussing its benefits, limitations, eligibility criteria, process, and key factors to consider before opting for this financial solution.
Unlocking the Benefits of Credit Against Fixed Deposits
Availing credit against your FD offers several advantages over conventional loans:
Lower Interest Rates
One of the major benefits of credit against FD is the lower interest rates offered by banks. Since the FD acts as collateral, the risk for the lender is reduced, leading to lower interest rates compared to unsecured loans like personal loans. This can save borrowers a significant amount of money in the long run.
Preserves FD Interest
By availing credit against FD, borrowers do not have to break their deposits prematurely. This means that they can preserve the interest accrued on the FD and continue earning a guaranteed return until the maturity date. This feature makes credit against FD a more attractive option for those who want to access funds without losing out on their FD returns.
Quick and Easy Processing
Credit against FD usually has a quick and hassle-free processing time. Since the FD acts as collateral, lenders do not have to conduct extensive background checks or verify income sources, making the loan approval process faster. This can be beneficial for individuals in need of urgent funds.
No Impact on Credit Score
Since credit against FD is secured by the deposit itself, it does not affect the borrower’s credit score. This means that even if the borrower defaults on the loan, it will not have a negative impact on their credit score. This can be helpful for individuals who are looking to improve their credit score or maintain a good score.
How Credit Against Fixed Deposits Works
Credit against FD works in a simple and straightforward manner:
- The borrower approaches the bank with an existing FD and requests a loan against it.
- The bank evaluates the FD and offers a loan amount based on a certain percentage of the FD value.
- The borrower accepts the loan offer and signs the necessary documents.
- The agreed-upon loan amount is then disbursed to the borrower’s account.
- The borrower repays the loan, along with interest, in regular installments as per the loan agreement.
It is important to note that the FD continues to earn interest during the loan tenure, and the borrower can access these funds once the loan is fully repaid.
Eligibility Criteria for Credit Against Fixed Deposits
Before availing credit against FD, individuals need to ensure that they meet the eligibility criteria set by banks. While the specific criteria may vary from bank to bank, there are certain common factors that lenders consider, including:
- Age: Most banks require borrowers to be at least 18 years old to avail credit against FD.
- FD Tenure: Banks may only offer credit against FDs with a minimum tenure of six months or more.
- FD Type: Some banks may not offer credit against tax-saving FDs or FDs held in joint names.
- Loan Amount: The loan amount offered may depend on the FD value, with a maximum limit set by the bank.
- Credit Score: While credit score does not play a significant role, some banks may still check the borrower’s credit history before approving the loan.
It is important to carefully review the eligibility criteria of different banks before applying for credit against FD to increase the chances of approval.
Types of Loans Available Against Fixed Deposits
There are several types of loans that individuals can avail against their FDs, including:
Overdraft Facility
The overdraft facility allows borrowers to withdraw funds from their FD account, up to a certain limit, while the FD continues to earn interest until maturity. This type of loan is useful for short-term financial needs and offers flexibility in terms of repayment, as borrowers can repay the loan at any time without any prepayment charges.
Fixed Deposit Loan
Fixed deposit loans allow borrowers to pledge their FD as collateral and avail a loan for a specific purpose, such as education or home renovation. The loan amount is disbursed in a lump sum and has a fixed tenure and interest rate. Unlike the overdraft facility, borrowers cannot withdraw funds from the FD account until the loan is fully repaid.
Demand Loan
Demand loans are short-term loans that are usually availed in case of emergencies. The borrower can request a loan amount based on the FD value and repay it within a few months with a high-interest rate. This type of loan is helpful for those facing a sudden cash crunch and need immediate access to funds.
Interest Rates and Repayment Options for Credit Against FD
Interest rates for credit against FD vary from bank to bank and may also depend on the loan type, loan amount, and the FD tenure. Typically, the interest rate for credit against FD ranges from 1% to 2% higher than the FD interest rate. It is recommended to compare the interest rates offered by different banks before choosing a lender.
As for repayment options, borrowers can choose from various options such as monthly, quarterly, or half-yearly installments. Some lenders may also offer a balloon payment option, where the borrower only pays the interest during the loan tenure and repays the principal amount in full at the end of the loan tenure.
Advantages and Disadvantages of Credit Against FD
While credit against FD offers numerous benefits, it also has its own set of advantages and disadvantages that borrowers should be aware of before opting for this financial solution.
Advantages
- Lower Interest Rates: As mentioned earlier, credit against FD generally comes with lower interest rates compared to other unsecured loans.
- Quick Processing: The loan approval process for credit against FD is usually faster, making it a viable option for those in need of urgent funds.
- No Impact on Credit Score: Since the FD acts as collateral, credit against FD does not have any impact on the borrower’s credit score.
- Flexibility in Repayment: Borrowers can choose from various repayment options, depending on their financial capabilities.
- Preserves FD Interest: By availing credit against FD, borrowers do not have to break their deposits prematurely, ensuring they continue to earn interest until maturity.
Disadvantages
- Limited Loan Amount: The loan amount offered against FD may be limited, depending on the FD value and the lender’s policies.
- Locked-in FD: Once the FD is pledged as collateral, it cannot be withdrawn until the loan is fully repaid.
- Risk of Losing FD: In case of default or non-repayment of the loan, the lender has the right to liquidate the FD to recover the outstanding amount.
- High Prepayment Charges: Some lenders may charge high prepayment charges if the borrower wants to repay the loan before the agreed tenure.
Factors to Consider Before Applying for Credit Against FD
Before opting for credit against FD, individuals should carefully evaluate all the factors involved to make an informed decision. Some key factors to consider are:
Interest Rates
The interest rate offered by the lender plays a crucial role in determining the cost of borrowing. It is advisable to compare interest rates offered by different banks to ensure you get the best deal.
FD Tenure
Banks may have different policies regarding the minimum FD tenure required to avail credit against it. It is important to check the FD tenure before applying for a loan.
Loan Amount
The loan amount offered may vary from bank to bank, and it is essential to choose a lender who offers a sufficient amount to meet your financial needs.
Repayment Options
Different lenders offer different repayment options, and borrowers should carefully review these options to choose one that best suits their financial capabilities.
Prepayment Charges
In case you plan to repay the loan before the agreed tenure, it is crucial to consider prepayment charges, as high charges can significantly impact the overall cost of the loan.
Alternative Investments
Before opting for credit against FD, individuals should also consider alternative investment options that may offer better returns or lower interest rates.
Alternatives to Credit Against Fixed Deposits
While credit against FD may be a suitable option for some individuals, there are other alternatives available in the market that may better suit their needs:
Personal Loans
Personal loans are unsecured loans that offer relatively quick processing times and flexible repayment options. However, they come with higher interest rates compared to credit against FD and may require a good credit score for approval.
Gold Loans
Gold loans are secured loans that allow borrowers to pledge their gold jewelry or coins as collateral. These loans usually have lower interest rates compared to personal loans but may have lower loan amounts as well.
Loan Against Securities
Individuals can avail of a loan against their securities such as shares, mutual funds, or bonds. These loans may offer competitive interest rates and repayment options but also carry the risk of losing the securities in case of default.
Best Practices for Managing Credit Against FD
To effectively manage credit against FD and reap its benefits, individuals should follow these best practices:
- Borrow Only What You Need: Since credit against FD comes with a lower interest rate, it may be tempting to borrow more than necessary. However, it is advisable to borrow only the required amount to avoid unnecessary debt.
- Repay on Time: Timely repayment of the loan is essential to maintain a good credit score and avoid any penalties or charges.
- Keep Track of Interest Rates: It is recommended to keep track of the interest rates offered by banks and consider switching lenders if a better option becomes available.
- Plan Your Finances: Before availing credit against FD, individuals should carefully plan their finances to ensure they can comfortably repay the loan without any financial strain.
- Have a Backup Plan: In case of any unforeseen circumstances, it is always advisable to have a backup plan in place to avoid defaulting on the loan.
Conclusion
Credit against fixed deposits is a useful financial solution that offers numerous benefits, such as lower interest rates, flexible repayment options, and the preservation of FD interest. However, individuals must carefully evaluate all the factors involved and consider alternative options before opting for credit against FD. By understanding the intricacies and following best practices, individuals can effectively manage their credit against FD and make the most out of this financial solution.
