Is It Better to Borrow a Loan against Fixed Deposit?

Whenever you have surplus funds at your disposal, the first investment avenue that comes to your mind is Fixed Deposit(FD). It is very popular in India due to its safety features, reliable rates of return and flexibility in investment tenures.

You procure loans for varied purposes like meeting emergencies/contingencies, servicing debts, funding your childrens’ education, purchasing a new vehicle etc. In short, sometimes you need to borrow funds to fulfil your immediate liquidity needs.

Under such circumstances, if you hold multiple fixed deposits, you may wonder if it is a good idea to procure loans by pledging your deposits. The obvious answer is ‘yes’. 

While banks and NBFCs both offer loan against FD, it is wise to see the fineprint for both. 

Borrowing loans against a fixed deposit is beneficial for the following reasons :-

• Lower interest rate on loans

The prime costs attached to loans are the debt servicing costs. Lower the interest rate on loans lower will be your debt servicing costs. Loan Against Deposit (LAD) facility allows you to procure funds at a lower rate.

It is better than personal loans which are lent at exorbitant rates in the range of 14-30% per annum. Moreover, your fixed deposit will continue to earn interest income till its tenure expires. 

The interest rates levied on LAD facilities differ from bank to bank. Mostly, interest rates charged on these loans is your FD interest rate plus 1% or 2%. NBFC like Bajaj Finance charges a very low interest and allows the FD to keep earning interest. 

• Penalty charges on foreclosure

Usually foreclosure of loans attracts penalty charges. However, banks do not levy any fines/penalty charges if you foreclose your loans raised by mortgaging your deposits.

• Flexible loan tenure

Your loan tenure is aligned with your term deposit tenure. The maximum period for which you are granted loans is equal to the tenure of the deposit itself. Thus, the flexibility of tenures inherent in fixed deposits is extended to your loans as well. Depending on the investment period of your deposits and your requirements, you can borrow short-term/long-term loans.

Many banks however do not extend the loan tenure beyond 5 years.

• Favorable repayment mechanism

Just like your Fixed Deposit account is linked to your savings account, your loan account too can be linked to your savings account. You can service your loans against deposits just like you pay Equated Monthly Installments on your home loans.

Your savings account will be debited with the specified loan installment amount on a stipulated date every month or as per the loan servicing frequency chosen by you.

You can also avail the periodic interest payout option on your FDs to pay up your loan installments.

• Miniscule loan processing fees

Fees for processing loans against deposits are zero or very nominal. This further reduces the costs attached to borrowing of funds.

• Favourable loan limit

The most striking feature of the LAD facility is that you can borrow money up to 90% of your total deposit value. Bajaj Finance allows you take a loan up to 75% of the FD value.

You can make use of the FD amount calculator available on the website of the concerned financial institution to deduce the maturity amount and maximum money you can borrow against it. The FD amount calculator will also help you in calculating your total debt servicing costs in the loan period.

So, if you have a major chunk of your investments in Fixed Deposits, then procuring loans against your FDs is recommended.

• Favourable mode of loan disbursement

Loans secured by FDs as collaterals are disbursed in the form of overdrafts against your deposit money. This is also an alternative to premature withdrawal.

Some qualifiers

• The LAD facility is not applicable for 5 year tax saving deposits.
• You cannot foreclose your FD account as now the bank has a lien over it till you pay back your loans.

But, overall raising loans using FDs as collateral is beneficial.