Loan Against FD Interest Rate: Comparison and Process Guide

If you are thinking about taking a loan against FD, the interest rate is usually about 1% to 2% more than the interest rate you are earning on your own Fixed Deposit, which is currently around 3.5%-9.5% depending on the tenure you choose, making it one of the cheapest ways to borrow as your FD is acting as collateral.

Quick Reads: 

• Your FD earns interest even when it is pledged as collateral.

• You can take a loan up to 90% of the FD value without affecting the deposit.

• Approval is quick because the collateral is a deposit with minimal paperwork.

• The loan against FD interest rate is mostly 1-2% higher than your FD rate and cheaper than a personal loan or credit card.

Imagine you have an urgent need for cash but don't want to withdraw from your Fixed Deposit (FD) and lose the interest you have already earned. In such cases, a loan against FD can be useful to you as it allows you to take a loan against your own Fixed Deposit as collateral. 

Let us first understand what a loan against FD is, the applicable interest rates, and how to apply for it.

A loan against your FD is not a separate loan by the bank or NBFC. But then, how does it work? Simply put, the NBFC/bank allows you to pledge your FD as collateral for a loan of up to 90% of the FD's value. Your FD remains parked with the bank and continues to earn the interest rate that it was earning when you opened it. Once you repay the amount that you borrowed plus the interest amount, the bank will release the lien on your FD. 

A personal loan is different because the bank looks at your income and credit history before sanctioning you a loan. Since you are using your own money as collateral, the bank is taking very little risk in giving you the loan. 

The interest rate on a loan against FD is not determined by the prevailing market interest rates. Instead, the financial institutions that offer FD loans grant you an additional rate of interest on top of your FD rate for providing them the lien on your FD.

As you can see, the longer your FD tenure and the higher its rate, the higher your loan rate will be as well, though the difference stays fairly constant at about 1-2%.

Some factors decide where in the 1-2% bracket your rate falls. Here are the usual suspects.

• Your FD's Interest Rate: The higher the base FD rate, the higher your loan rate, given that your loan is priced as a spread over it.

• Lender Type: Public sector banks usually add a smaller spread than private banks or NBFCs.

• Loan-to-Value Ratio: Taking a loan closer to the 90% limit can sometimes fetch you a slightly higher rate.

• FD Tenure Remaining: A longer remaining tenure on your FD can also impact the spread that a lender offers.

This comparison is rather common, and the difference is evident at first sight. Below are the main characteristics of the two types of loans, presented in a table for a better perspective.

A loan against FD offers significant advantages in rates and speed, but it requires an FD as collateral. In its absence, a personal loan is a valid and reliable alternative.

Getting this loan is surprisingly simple, which makes it stand out from the rest. Most lenders follow the procedure put forth: 

1. Apply for the loan through your bank's net banking, mobile app, or branch, and mention the FD you want to pledge. 

2. The lender then puts a lien on the FD you mentioned. 

3. The money gets transferred to your account on the same day, sometimes within minutes. 

4. You can clear the loan via EMIs or a one-time payment, and the lien is removed once the loan is repaid.

What Documents Do You Need?

Since your FD acts as security, the required documents are limited to proof of identity (Aadhaar or PAN), your FD receipt/account details, and a loan application form. Existing customers with net banking access can often even avoid submitting documents. 

Beyond the low rate, several reasons make this option a preferred choice for a short-term cash loan. These include: 

• Continuation of the initial FD’s interest: The feature that makes the FD loan attractive to many is the fact that the interest on the original FD does not cease to exist as long as it is in the account.

• No prepayment penalty: Most lenders offer an option that lets a borrower cancel or prepay the loan without incurring any additional charge.

• Rapid disbursement due to minimal processing: And finally, there is no credit assessment involved with the loan; hence, no time for processing.

If you have an FD on hold and need short-term funds, a loan against it is usually a cheaper, much faster option. The only time it isn't a good option is when your fund needs exceed your FD's capacity, in which case you might need a smaller personal loan alongside it, or a combination of both.