Fixed deposits are one of the most convenient ways to raise funds at a lower cost. You can borrow against FD in two ways – take a loan or ask the bank to issue an overdraft (OD).
In an overdraft, the financial institution will sanction a limit based on the value of the fixed deposit. If a borrower has ₹10 lakh as a fixed deposit, a bank could approve an OD of up to ₹9 lakh. The borrower can withdraw any amount up to ₹9 lakh. There is no fixed duration for repayment of an overdraft. The borrower needs to pay the interest for as long as he holds the money.
The loan against FD is like any other loan. The borrower gets money on one shot and repays equated monthly instalment.
Typically, banks charge about two percentage points higher than the FD rate when they give a loan. If a depositor had booked an FD at 7%, the interest rate on loan against FD would be 9%.
However, some banks like Punjab National Bank and State Bank of India charge 0.75 and 1 percentage points higher than the FD rate, according to data from Paisabazaar.com, an online marketplace for banking products.
These banks also have a cap ( ₹25,000) for online loan against FDs. If the requirement is higher, the depositor would need to visit the branch.
Taking a loan against FD works better than liquidating it when the funds required is lower than the money parked in the FD.
Say you have an FD of ₹10 lakh but need only ₹3-4 lakh. A loan would be a better option. There is a premature penalty on the withdrawal of FD. In many cases, a loan would be more cost-effective than paying the fine, especially when the borrower can prepay it.
But if you don’t have clarity on whether you would repay on time, it’s better to break the FD. Do remember that the default on loan against FD can impact your credit score.
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