Loan Against Fixed Deposit

A loan against a fixed deposit (FD) is one of the easiest and fastest ways to access funds without breaking your fixed deposit investment. Many banks and financial institutions offer loans against fixed deposits, allowing deposit holders to meet urgent financial needs. While continuing to earn interest on their FD.

Compared to a personal loan, a loan against an FD comes with a lower interest rate, quicker approval, and minimal documentation requirements.

This article discusses what a loan against a fixed deposit is, how it works, its eligibility criteria, benefits, limitations, and key differences from other borrowing options.

What is a Loan Against Fixed Deposit (FD)?

A loan against a fixed deposit is a secured loan offered by banks and financial institutions against an existing fixed deposit. Instead of prematurely withdrawing a fixed deposit and losing the accrued interest, deposit holders can pledge their FD to obtain a loan.

The lender keeps the fixed deposit as collateral and provides a loan amount based on the percentage of the FD value. Typically, banks offer 75% to 90% of the FD amount as a loan.

Example: Suppose you had a fixed deposit of ₹2,00,000. Then you are eligible for a loan of up to ₹1,80,000 (90% of ₹ 2,00,000), depending on the lender’s policies.

The interest rate on a loan against a fixed deposit is usually 1% to 3% higher than the FD interest rate.

Also Read: FD credit card vs Regular credit card

How Does a Loan Against Fixed Deposit Work?

A loan against a fixed deposit works by using your FD as collateral. The lender marks a lien on the FD, preventing withdrawal until the loan is repaid.

Here is the step-by-step process to understand the working of a loan against a fixed deposit:

• Loan Application:

The borrower applies for a loan against an existing fixed deposit with the bank.

• FD Pledge:

The fixed deposit is pledged as collateral against the loan amount.

• Loan Approval:

The lender verifies the FD details and sanctions the eligible loan amount.

• Fund Disbursement:

The approved loan amount is credited directly to the borrower’s account.

• Loan Repayment:

The borrower repays the loan through EMIs or lump-sum repayment as per the lender's terms.

• FD Release:

Once the loan is fully repaid, the lien on the fixed deposit is removed.

Eligibility Criteria to Avail a Loan Against a Fixed Deposit

The eligibility requirements for a loan against fixed deposits are as follows:

• FD Ownership:

An applicant must hold an active fixed deposit with the lending institution.

• Minimum FD Value:

The fixed deposit must meet the lender’s minimum deposit requirement.

• Resident Status:

Resident Indians and eligible NRIs can apply for the facility.

• Age Requirement:

An applicant must satisfy the minimum age criteria specified by the lender.

• Valid KYC Compliance:

The customer must complete all KYC formalities with the financial institution.

• Loan Margin Compliance:

The requested loan amount must remain within the approved loan-to-value (LTV) ratio.

Documents Required for a Loan Against Fixed Deposit

The documents required for a loan against a fixed deposit are as follows:

• Identity Proof:

PAN card, Aadhaar card, passport, driving licence, or voter identification card.

• Address Proof:

Utility bill, passport, Aadhaar card, rental agreement, or any other approved address proof.

• FD Receipt:

Fixed deposit certificate or FD account details issued by the bank.

• Loan Application Form:

A duly completed and signed application form is submitted to the lender.

• Photographs:

Recent passport-size photographs, as required by the lending institution.

• KYC Documents:

Updated Know Your Customer (KYC) documents, as required under applicable regulations.

Advantages of a Loan Against a Fixed Deposit

The benefits of a loan against a fixed deposit are as follows:

• Lower Interest Rate:

Interest rates are generally lower than personal loan rates because the loan is secured by collateral.

• Quick Approval:

Loan processing is faster due to reduced credit risk and minimal verification requirements.

• FD Earnings Continued:

Borrowers continue earning interest on the fixed deposit during the loan tenure.

• Minimal Documentation:

Documentation requirements are significantly lower compared to traditional loan products.

• No Credit Score Dependency:

Approval primarily depends on the fixed deposit rather than credit history.

• Flexible Repayment:

Many lenders offer flexible repayment options suited to customer requirements.

• High Loan Amount:

The borrowers can obtain a substantial percentage of the FD value as a loan.

• No Premature Withdrawal:

Customers can avoid breaking the fixed deposit and losing accumulated interest benefits.

Limitations of Loans Against Fixed Deposit

Despite several benefits, the loan against an FD has certain limitations.

• Limited Loan Amount:

Loan eligibility depends on the FD value and cannot exceed the approved loan-to-value (LTV) ratio.

• FD Lien Restriction:

Borrowers cannot withdraw or close the fixed deposit until the loan repayment is made.

• Interest Cost:

Borrowers must pay additional interest above the fixed deposit interest rate.

• Risk of Adjustment:

The unpaid loans may be recovered by adjusting the fixed deposit amount.

• Restricted to FD Holders:

Only customers with an eligible fixed deposit can avail themselves of this facility.

• Limited Tenure:

The loan tenure often depends on the remaining maturity period of the FD.

Loan against FD vs Overdraft Against FD

Here is the difference between a loan against FD and an overdraft vs FD in a tabular format:

Also Read: Fixed Deposit vs Post Office Deposit

Who can apply for a loan against an FD?

Here are those who can apply for a loan against an FD:

• Individual Depositors:

Single account holders with an eligible fixed deposit can apply for a loan against it.

• Joint FD Holders:

Joint deposit holders may apply, subject to the lender’s terms, conditions and approvals.

• Senior Citizens:

Senior citizen FD holders can also avail themselves of loans against their deposits.

• Salaried Individuals:

Salaried customers can use a loan against an FD for emergency financial requirements.

• Business Owners:

Entrepreneurs may utilise the facility for working capital and business needs.

• NRI Depositors:

Eligible Non-Resident Indians (NRIs) can apply according to bank-specific guidelines.