Introduction
Fixed deposits (FDs) are not just a safe investment tool; they can also serve as a source of emergency funds through a feature known as a loan against fixed deposit. This facility allows depositors to borrow money from the bank by pledging their FD as collateral, thus avoiding the need to break the deposit prematurely. It is a convenient, quick, and low-interest borrowing option compared to personal loans or credit cards. This article outlines the complete process of taking a loan against a fixed deposit, the eligibility, benefits, and important considerations to keep in mind.

Eligibility criteria
Most individuals who hold fixed deposits with a bank are eligible to avail a loan against them. This includes resident individuals, senior citizens, and even businesses or entities that have FDs in their name. However, the fixed deposit must be free from any lien or encumbrance. Tax-saving FDs and FDs under special lock-in schemes typically do not qualify for loan facilities.

Loan amount and limit
Banks generally offer loans up to 75% to 95% of the FD’s value, depending on their internal policies. For example, if you have a fixed deposit of ₹1,00,000, you may be eligible for a loan ranging between ₹75,000 to ₹95,000. The sanctioned loan amount depends on the tenure, principal, and interest accrued on the FD.

Interest rate on loan
The interest rate charged on a loan against FD is typically 1% to 2% higher than the interest rate earned on the fixed deposit itself. For instance, if your FD earns 7% per annum, the loan may carry an interest rate of around 8% to 9% per annum. This rate is significantly lower than the rate charged on unsecured personal loans or credit cards.

Loan tenure and repayment
The tenure of the loan against FD is usually linked to the tenure of the underlying fixed deposit. The loan must be repaid before the maturity of the FD. Repayment can be done in lump sum or in EMIs, depending on the bank’s terms and your preference. Some banks offer flexible repayment options, including overdraft facilities, where you pay interest only on the amount utilized.

Loan processing and disbursement
To apply for a loan against FD, you can visit the bank branch or log in to the bank’s net banking platform. The process is relatively simple and does not involve lengthy paperwork or income proof since the FD serves as collateral. The bank creates a lien on the fixed deposit and disburses the loan amount either into your savings account or as an overdraft limit.

Documentation required
The documentation process is minimal. Typically, banks require the fixed deposit receipt, a signed loan application form, and identification documents like PAN card or Aadhaar card. If the FD is in joint names, all account holders must sign the loan agreement. Some banks may also require KYC verification if not already done.

Premature closure and implications
If you wish to close the FD before maturity while the loan is still active, you must first repay the loan amount in full. Banks do not allow premature withdrawal of an FD that is under lien for a loan. Closing the FD without loan repayment could lead to penalty charges, interest loss, or adjustment of the FD value against the outstanding loan.

Loan against fd vs personal loan
A loan against FD is secured and therefore carries lower interest rates compared to personal loans, which are unsecured. It also requires minimal documentation, faster disbursal, and no credit score check. On the downside, the loan amount is limited to the value of the FD, making it unsuitable for larger funding needs.

Overdraft facility on fd
Many banks offer overdraft facilities instead of a traditional term loan against FD. In this case, a credit limit is set based on the FD value, and the borrower can withdraw funds as needed. Interest is charged only on the amount utilized, not the entire limit. This provides greater flexibility in managing cash flow and emergencies.

Points to remember
Always compare loan terms and interest rates across banks before opting for the loan. Make sure the FD tenure aligns with your borrowing needs. Monitor interest payments to avoid defaults, which could affect the value of your investment. Lastly, use this facility wisely and only when you have no other low-cost borrowing options available.

Conclusion
Taking a loan against a fixed deposit is a smart way to access funds in times of need without disrupting your long-term investments. It offers attractive interest rates, quick processing, and flexible repayment terms. Whether you opt for a term loan or an overdraft facility, this feature adds liquidity to your financial plan while ensuring your savings continue to earn interest. By understanding the terms and managing the repayment responsibly, you can make the most of this secure and efficient borrowing option.

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