Is it a good idea to take a loan against a Fixed Deposit (FD)? How does borrowing against your bank deposits affect your finances?

Before taking a loan against an FD, it is essential to understand the interest costs and the potential losses incurred by prematurely closing (breaking) an FD. Learn when a 'loan against FD' is the right choice for you, and when it might be better to simply withdraw the deposited funds.

People open FDs in banks to keep their money safe while earning interest. However, when an urgent need for cash arises, many choose to take a loan against their FD rather than breaking it. This is known as a 'loan against FD.'

In this arrangement, the bank holds your FD as security and provides a loan in exchange. Your FD generally remains active, and you continue to earn interest on it; however, the bank charges separate interest on the loan. Let’s explore this in detail.

How much of a loan can you get against an FD?

Banks do not provide a loan equal to the full value of the FD. Many banks offer a loan or overdraft facility of up to approximately 90% of the FD's value. For instance, if you have an FD of ₹5 lakh, you could potentially avail a facility of up to ₹4.5 lakh (90% of the value).

What is the interest rate on a loan against an FD?

The interest rate on a loan against an FD is typically slightly higher than the interest rate earned on the FD itself. Banks like SBI and Bank of Baroda charge an additional 1% interest over and above their deposit interest rate. At Axis Bank, the rate is 2% higher than the FD interest rate.

Rules vary from bank to bank.

For example, if you have an FD of ₹5 lakh earning 7% annual interest, and the bank charges 1% more for a loan, the loan interest rate would be 8% per annum. If you take a loan of ₹3 lakh for 6 months, the interest cost would be approximately ₹12,000.

What are the losses incurred by breaking an FD? If you close a fixed deposit (FD) prematurely, the bank recalculates the interest based on the actual duration the funds remained deposited. Additionally, a premature closure penalty may be applied. This means you might receive less interest than what you had initially anticipated when opening the FD.

When should you take a loan against an FD?

Taking a loan against an FD is a suitable option if you need funds for only a few months and are confident that you can repay the loan on time. This allows your FD to remain active, avoiding the need for premature closure.

When is it appropriate to close an FD prematurely?

If you require funds for a long period and are uncertain about when you will be able to repay a loan, closing the FD is a better choice. This eliminates the pressure of making monthly interest payments. However, if the FD is nearing its maturity date, it is generally not advisable to close it prematurely.