In a financial crunch a loan is often a shelter under which we have to seek refuge. Be it medical emergency or an urgent refurbishment of home or even picking up a wedding expense, applying for a loan is a last refuge for many of us. However, these loans are unsecured and banks or NBFCs charge high interest rates.
But, do you know you can easily avoid taking an unsecured loan – all personal loans are unsecured – if you have a fixed deposit (FD). You can offer the fixed deposit certificate as a collateral to the lending institution. The basic concept is, if the borrower fails to repay the loan, fully or partially, the banks or NBFC that has given the loan will recover their money from the maturity payment of the FD.
FD as a collateral for loan
When you pledge a Fixed Deposit (FD) as a collateral to secure a loan, the amount of loan depends on the FD deposit amount. According to rules of most banks/NBFCs, the amount can be as high as 90–95% of the amount deposited in the FD. Please note that once an FD is used as a security, the lending institution comes to own it unless the full amount taken as a loan is paid back.
Benefits of using FD as a collateral
The benefits are obvious. The customer does not lose his investment and can get it back after the loan is repaid. However, the biggest benefit is the reduction in interest rate compared to an unsecured loan and the pressure of a higher EMI.
What is the interest rate for loan against FD
If you pledge a FD as a collateral, banks generally allow loans in the form of overdrafts. It becomes a secured loan and, therefore, carry lower interest rate compared to unsecured loans. Overdrafts typically carry an interest rate that are 1-2% higher than the interest of the FD pledged. If the FD bears an interest rate of 7%, the OD will charge 8-9% per year. But who cannot pledge a FD to take a loan? If the fixed deposit (FD) is in the name of a minor, or if it is a tax saver FD with a 5-year tenure, it cannot be used to pledge against a loan.
Loans are a powerful financial help in emergency situations. But the biggest detriment of a loan is the interest rate and anything that helps the applicant to reduce interest rates is extremely useful. Personal Finance Business News – Personal Finance News, Share Market News, BSE/NSE News, Stock Exchange News Today
