Liquidity management remains at the top of any financial planning. Investment is a method by which an individual saves money and let it increase so that future financial demands can be fulfilled. But future is unforeseen and demand of money can arise at any time. Thus investment strategy places a very important role in providing fund at such events. And, fixed deposits come as a rescue to it. Loan can be granted on the fixed deposit to raise short term money instead of breaking the fixed deposit.
Banks provide loan against a Fixed Deposit as an overdraft up to the 90% fund value of the deposit. Breaking up of a fixed deposit is not beneficial for the bank too. Thus banks provide lower interest and risk free loan to the fixed deposit holders. Benefits of loan against FD are:
- Liquidity management: loan against FD helps in meeting short notice credit demand while keeping your savings intact. It also saves from selling up of assets into discount to get the money.
- Save on interest rates: because loan is taken against a deposit, interest rates are very low. Some bank even charge only 1% extra then what one get on fixed deposit.
- 90% of fund value: the granted loan even can be of 90% of the fund value of a fixed deposit.
- Repayment facility: Loan can be replayed as lump sum or in instalments. If party defaults on providing the money back, the net balance of a fixed deposit will be paid on the maturity of the FD.
- Other facilities: the loan amount can be accessed through ATMs or used via cheques.
Applying for the loan
So you’ve acted smartly. You want to take a loan on your fixed deposit and do not want to break it. Good! The process itself is very simple. Just fill up the form for loan, attach required documents and fixed deposit receipt. After reviewing the documents, bank approves loan payment.
Apart from above mentioned pointes, a loan issuer must have to take care of following points.
The term of the loan is restricted to the maximum of the term of the fixed deposits.
The loans which are free from lien or restrain are only issued. Thus, if fixed deposit is on a minor, the loan may not be issued.
If the fixed deposit is opened jointly, the loan document must incorporate the sign of all the holders. The responsibility of its redemption rests with all the holders equally.
The interest payments on FD are payable to the account holder. The repayment of the loan should be done separately.
Personal loans against a fixed deposit can really be a very good facility at the time of credit crunch. So, don’t worry about the future if you are a Fixed deposit holder.