Is loan against FD a safe way for emergency fund?

With the busy lifestyle of today, financial crisis can arise at any time. A medical emergency, sudden need to fix the house, or an unplanned trip are some common crisis scenarios. In all these situations, sudden availability of money is the answer. For the majority, loan against an FD seems to be a very attractive way. But is it actually a safe and suggested option for emergency funds? In this blog, we are going to understand the nitty-gritty of loan against your fixed deposit, pros, interest rates, and the risks associated so that you can make a well-informed choice.

What is a loan against fd?

Loan against FD is a secured personal loan in which your fixed deposit is held as security. Rather than encashing your FD early — which can invite penalty and loss of interest — you may take a loan against your FD as cash. Banks and financial institutions offer most of them, through which you can get a percentage (of the order of 70-90%) of the value of your FD. Loan amount varies with your FD term and deposit amount.

The best part of this facility is that you get instant access to cash without having to encash your FD. Your initial fixed deposit earns interest for the entire loan term, as per bank rules. It is a risk-free and easy credit facility for families who hold most of their savings in FDs for safety and fixed returns.

Advantages of taking loan against fd in india

One of the greatest advantages of a loan against FD is the ease during emergency situations. Because the loan is backed by your FD, the cash is disbursed by the banks at once, i.e., within 24 to 48 hours. This may prove to be a savior if you require instant money without the hassle of collateral valuation or complex paperwork.

The other major benefit is the decreased loan against FD interest rate over unsecured personal loans. Since your FD is used to collateralize the loan, banks charge lesser interest rates, normally down to 9% annually. This reduces your payment burden during hard times.

Also, as opposed to cashing out your FD and forfeiting the interest earned or paying premature withdrawal charges, you still earn interest on your FD while you settle the loan. This double advantage allows you to continue your savings habit while addressing immediate fund needs.

Finally, the facility of easy repayment helps you to handle cash flows in a better way. All banks provide either monthly interest payment or end-of-tenure payment of the entire amount facility, providing you with an option of repayment without burdening your monthly budget.

Loan against FD interest rate in India

Loan against FD interest rate in India differs across various banks and financial institutions. It is generally between 9% to 12% per annum. For instance, Axis Bank offers loan against FD with an interest rate of 9.75% onwards, while Bajaj Finance may have a marginal difference based on tenure and personal credit scores.

The rate of interest charged is usually tied to the period of your fixed deposit. The longer periods of the FD carry lower rates on the loan, which encourages borrowers to keep their deposits under lock-in and avoid credit.

The interest on the loan is normally charged on a reducing balance basis, and you're only paying interest on borrowed funds. That is, if you pay back some of the loan prematurely, the interest load decreases proportionately, and your finances are eased.

Remember, banks do not impose processing charges or small fees on loan against fd, thus it is one of the most cost-effective borrowings as compared to personal loans or credit cards for urgent fund requirements.

Disadvantages and risks of loan against fd

Though lending against FD is safe, you should keep some risks in mind. The major risk is that your fixed deposit secures the loan, and in case of default in repayment, the bank can sell your FD in order to return the dues. This may adversely affect your savings as well as financial security.

Also, despite lower interest rates compared to unsecured loans, cost of borrowing may be cumulative based on whether the loan duration is long or the repayment postponed. It is advisable to borrow the amount you really need and have a good repayment plan.

And another is that converting your FD to loan keeps the major part of money tied up for the loan term. You miss out on other opportunities where you could have spent the money in earning money through profitable investments or expenditure.

Finally, certain banks would insist on holding the FD for a duration (such as 6 months) prior to granting you the facility of a loan against it. This is a downside when there is a pressing need where money needs to be received urgently.

Alternatives to loan against fd for emergency funds

Though a loan against FD is a sure thing as a fund in emergency, it is prudent to consider the other options before deciding on the one that suits your financial status the best.

A good choice is a personal loan that is collateral-free and unsecured. Personal loans, however, are expensive in interest, which usually falls in the range of 12% to 20%. The repayments thus become expensive.

Overdraft against your savings account or a cash advance through a credit card can provide you with money at short notice but at a very high rate of interest and fee.

Liquid mutual funds or liquid funds and savings accounts can be your best bet too for emergency funds. They may not provide you with much of an interest as fixed deposits, but they provide instant access without penalty or cost of interest.

Others prefer to borrow from family or friends under an emergency scenario in an attempt to avoid charges on interest. This, however, becomes risky if the dates of repayment are not kept.

How to apply for loan against fd

Applying for a loan against FD in India is simple, made easy.

Initially, you must have a running fixed deposit account at the bank from which you intend to borrow. Second, complete the loan application form issued by the bank either online on the bank's official website or by hand at the branch.

You will have to submit papers such as your FD receipt, proof of identity (Aadhaar card or PAN card), and proof of address (passport or bills). Your documents and FD information are checked by the bank.

The loan is sanctioned by the bank after verification, which is normally 90% of the FD amount, as per their norms. The sanctioned fund is credited in your associated savings account within a day or so, normally 24-48 hours.

Make sure to discuss the loan against FD interest rate and repayment options with your bank beforehand to avoid surprises. Bajaj Finance, for example, offers clear terms and easy EMIs to match your repayment capacity.

Is loan against fd a safe option for emergency fund

The loan is secured, at less expensive interest charges, with less paper work, and you are able to keep your savings' interest returns. All these put together make it a more preferable option over unsecured loans or breaking of pre-mature FD.

But do borrow wisely, considering your payment capability so that you don't lose your FD. And do compare the exact loan against FD interest rate and tenure terms before opting for it.

For those who have no pressing liquidation requirements and would like to preserve their fixed income, this facility is the finest financial pillow during hard times.

Conclusion

Loan against FD can be a comfort balm in times of financial crises, offering security, affordability, and instant access to money. It allows you to lock away your investment and meet surprise expenses with ease. With interest rates being much lower than unsecured loans and easy steps, it is definitely a clever emergency fund option for the majority.

To get the most out of it, opt for a well-known lender such as Bajaj Finance, learn about the precise loan against FD interest rate, and schedule your repayments. This strategy of balance makes you financially secure while you navigate the unexpected turns of life.

By considering a loan against FD, you’re not just borrowing funds but also protecting your hard-earned savings. It’s a secure bridge that keeps your finances steady in emergency storms, ensuring peace of mind.