In our country, its been numerous decades since bank FD has been a popular saving instrument for many households. Fixed deposits are one of the easiest and safest ways to invest money since they offer a guaranteed interest income as well as the repayment of the principal at the rates that were booked. This makes them a popular choice among individuals, especially those who try to avoid taking unnecessary risks.
However, when it comes to sudden or unforeseen financial exigencies during the term of their ongoing FD, consumers typically jump at the concept of breaking their FDs in order to tide over finance requirements. This is because breaking an FD allows for immediate access to the funds. To acquire access to the funds invested in your FD without having to make an early withdrawal, you might, however, take out a Loan Against Fixed Deposit rather than performing what was just described.
Before applying for a loan against a fixed deposit, there are five crucial factors to consider.
Eager to know? These are the following is an explanation of the five most important criteria that one must consider when taking an FD loan instead of a Loan on Aadhar card:
The majority of lenders will provide a loan against FD in the form of an overdraft facility, and they will not charge you any costs for the processing or prepayment of the loan. Due to the fact that this loan is an overdraft, the majority of the time, the depositor is only obliged to pay interest on the amount that has been utilised from the limit that has been sanctioned, and interest will only accrue on the amount that has been drawn until it is paid back.
The amount required for eligibility
The total value of the fixed deposit and the amount of time remaining until it matures are the two primary determinants of how much of a loan can be taken out against the FD. Depending on the minimum and maximum loan amount caps, if any, imposed by the bank, banks will often lend out up to 90 percent of the amount of a fixed deposit as loans. Some loan lenders say that they can provide loans for up to 95% of the amount of the FD. If you have an aadhaar card, then don’t forget to check the details of the Loan on Aadhar card too.
The rate of interest
Lenders will lend Loan Against Fixed Deposit at an interest rate that is typically 1% to 2% higher than the rate that is already being paid on the FD that is being used as collateral. Keep in mind that the depositor will continue to earn interest on the fixed deposit that was pledged throughout the duration of the loan. Also, do not forget to check the applicable interest rate on others loan options, like a Loan on Aadhar card, as these can turn out to be handy in some cases.
The remaining term of the FD that was used as collateral determines how long the loan repayment term will be, in addition to any minimum and maximum tenure limits that the bank may impose (if they do so at all).
Due to the fact that a Loan Against Fixed Deposit is typically extended in the form of an overdraft, the borrower is required to make repayments on the loan until the maturity of the fixed deposit’s tenure. This is in contrast to other typical loans, in which the borrower is required to repay the loan through EMIs.
It is important to keep in mind that because the FD is marked with a lien in favour of the bank, it provides the bank with an automatic claim over the deposit for the duration of the deposit. In the event that the utilised amount is not repaid along with the applicable interest, the bank may either recover the same from the deposit amount that is payable at maturity or may automatically renew the FD at the rates that are currently in effect for the same amount of time and the same amount that has been sanctioned. When checking details of FD loans, also try and enquire about the availability of a Loan on Aadhar card facility, which is often unknown to many individuals who are in need of funds.
What happens if you decide to make an early withdrawal instead of taking out a loan on your FD?
When you make an early withdrawal from your fixed deposit (FD), banks will often charge you a penalty rate of up to one percent. They will then deduct this rate from the actual interest rate before calculating the amount of the FD that will be closed. This effective interest rate is typically a smaller percentage than either the rate that was negotiated for the FD or the rate that was offered on the card for the time period in which the FD was held by the bank.
Consider the following scenario: You opened a fixed deposit in the amount of Rs 10,000 at a booking rate of 7.50% per annum for a term of three years. The bank imposes a 1% penalty on early withdrawals. In the event that you make a withdrawal on the completion of the first year of the FD, the bank will deduct 1% of the rate either from your card rate on the date of deposit for the period of 1 year (assuming it was 7.25%), or the contracted FD rate for the entire 3 year tenure (7.50%), whichever is lower. In the event that you withdraw on the completion of the first year of the FD, the bank will deduct 1% of the rate.
Your fixed deposit (FD) closure amount would be calculated at 6.25% p.a. for a tenure of 1 year compounded quarterly in this scenario, which results in Rs. 10,639 (@6.25%) rather than Rs. 12,497 in the event that the FD was held for its full three-year term and was closed out.