Loan Against Fixed Deposit: How Good is it?

Fixed deposits are the most preferred way to save some funds in India. Fixed deposits are measured as a safer option as opposed to the stock market and mutual funds. Term of deposits can be of couple of types: first on is FD and second one is recurring deposits.

FD is a most powerful investment option where anyone will invest their saving at a single time. If you select recurring deposits then you need to invest your saving regularly over a period of time. The procedure of the investing money in fixed deposit is very simple and it is considered extremely secure. Another term commonly associated with fixed deposit is the overdraft facility. Another term commonly associated with fixed deposit is the overdraft facility.

What is Overdraft Facility?

If you are in dire need of some money and you have no available funds in your account, it is advised that instead of closing your fixed deposit, you take a loan against your fixed deposit. This facility is called as an overdraft facility. But there is a limit on the amount of money that can be drawn. In addition, you will also need to pay some interest.

How Much Loan can you Take?

By availing this facility, you can withdraw 70-90% of the amount from your fixed deposit account. The amount that you can withdraw is completely dependent on your financial institutions or lenders. The financial institutions or lenders will charge you interest which you have to repay the overdraft amount. The rate of interest charged by the financial institutions or lenders differs depending on the financial institutions or lenders but generally, 2-2.5% rate of interest is charged. Overdraft facility helps you when you need cash in an emergency while keeping your savings or investments in place. It is sometimes called loans against Fixed Deposit.

In case you lose the loan money that you get, the fixed deposit too is lost. In case you are unable to repay the overdraft amount you might be required to pay a penalty. Generally, financial institutions or lenders do not levy any processing fees.

Term and Payment Process:

The tenure or the term of overdraft facility is same as the term of the fixed deposit. The repayment of this overdraft facility is similar to any other loan that you can take. An Equated Monthly Installment (EMI) is decided upon by the financial institutions or lenders depending on your monthly income and based on that you will have to make monthly payments.

If you happen to have obtained some funds from a salary hike or gained profit in the share market, you can use that money to pay off the debt from the overdraft facility. Generally, no penalty is charged by the financial institutions or lenders if you foreclose this loan.

Loan against your fixed deposit can be a great alternative when you desperately need the money. If you opt for a loan against fixed deposit, you will be charged a higher rate of interest as compared to the rate of interest you will be charged I you opt for a personal loan. By opting for this option, you will also receive interest every month on the original fixed deposit.

One of the drawbacks of taking a loan against your fixed deposit, you cannot break your fixed deposit and you will not get and tax benefits on the rate of interest that you pay against the loan.

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About aman khanna

aman khanna

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