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All that you need to know about loan against Fixed Deposits
Ashish Rao, 41, is a lawyer specialising in real estate matters. After working for a reputed law firm for over a decade, he decided to branch out independently. He took a nice office on a long lease and was in the process of doing up the interiors.
Since he had planned this move for a while, he had set aside a sizeable amount for this purpose. But as it often happens in interior decoration projects, his expenses overshot his budget. Ashish thought of liquidating some of his Fixed Deposits (FDs) and spoke to his Axis Bank Relationship Manager (RM). The RM suggested that Ashish should take a loan against them instead of liquidating his FDs. He explained the advantages of such a step.
What is Loan Against FD?
A loan against FD is when you borrow a part of the sum held in a Fixed Deposit with your bank without actually liquidating the FD. There are multiple advantages to doing so.
No Need to Pay a Penalty
Premature liquidation of an FD attracts a penalty. It also involves loss of accrued interest. This can be avoided if you borrow against the FD instead, which will continue to accrue interest till maturity.
Lower Interest Rate
A loan against FD is secured by a Fixed Deposit. This means that if the borrower doesn’t repay the loan, the bank will recover the pending amount from the FD. However, because the loan is secured, the interest rate charged is much lower than taking a personal loan or business loan.
Typically, interest rates for such loans vary between 12–18%. FD interest rates, however, are much lower — typically 2% more than the interest received on the FDs. The RM explained how it works.
She pointed out that the various FDs that Ashish held with the bank had an interest rate ranging from 2.5% to 5% (depending on their tenure). If he borrows against these FDs, he will be charged an interest rate ranging from 4.5% to 7%.
But here is the beauty of the instrument: the Bank will only lend up to a maximum of 85% of the FD amount. Since Ashish’s FD of ₹100,000 continues to earn interest of 5%, and he has to pay an interest of 7% on a loan of ₹85,000 (85% of ₹100,000), here is how the effective interest rate calculation works:
- FD amount – ₹100,000
- Interest rate – 5%
- Annual Interest earned – ₹5,000
- Loan Amount – ₹85,000
- Interest Rate – 7%
- Annual Interest on loan – ₹5,950
- Effective interest outgo = ₹5,950 – ₹5,000 = ₹950
- Effective interest on loan = ₹950 / ₹85,000 ≈ 1.1%
This is, by far, the cheapest debt available!
Also Read: New to investing? Here’s why you should look at bank FDs
No Paperwork
Since Ashish is already a customer of the Bank, his KYC details are already updated. Since a loan against a Fixed Deposit is a secured loan, he doesn’t need to furnish any income details.
No EMI and No Penalty
A loan against a Fixed Deposit is co-terminus with the FD. This means that the tenure of the loan is the same as the tenure of the FD. Because of this, there are no EMIs (equated monthly instalments) involved and no pre-payment penalty.
Ashish can pay off the loan any time he chooses. Interest is charged on the actual amount utilized and for the tenure of utilization.
The RM, however, advised Ashish that if he required a loan for a tenure that was longer than the maturity period of his FD, he should perhaps look at taking a personal loan or business loan.
Axis Bank Loan Against Fixed Deposits come with many exciting features. You can also know more about interest rates on deposits or use Axis Bank’s FD calculator.
Disclaimer: The Source, a content creation and curation firm, has authored this article. Axis Bank does not influence the views of the author in any way. Axis Bank and The Source shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
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