Understand the Advantages of Securing a Loan Against Your Fixed Deposit

Introduction

As a financial tool, a fixed deposit (FD) does not only serve as an avenue to grow one’s savings with assured returns, but it can also be the rescuer in times of financial contingencies. If mid-term liquidity hitches arise, one need not worry about dissolving their fixed deposit prematurely. Instead, they can avail themselves of a loan on FD, a facility offered by various financial institutions. In this article, we'll delve into the multiple benefits of securing a loan against your fixed deposit.

Working Mechanism of a Loan on FD

Before we proceed to the benefits of a loan on FD, let’s understand how it works. A loan against a fixed deposit is essentially a secured loan where the FD acts as the collateral. It's like getting a loan while keeping the fixed deposit untouched, which continues to earn the stipulated interest. This process provides a speedy solution to get funds without having to break your FD.

Benefits of Securing a Loan Against Your Fixed Deposit

The first benefit is the ease and convenience of availing loans on FD. Since it is secured against your FD, the financial institution can process the loan swiftly. It's not like a conventional loan scenario where you need to meet numerous eligibility criteria and submit a bevy of documents. With loans on FD, the eligibility is already established with the FD being the collateral.

Secondly, the interest rates on loans against FD are considerably lower when compared to personal loans or credit card debts. The rates are usually 1-2% higher than the interest earned on the FD. This allows you to manage your finances better without being burdened by high-interest rates.

Then, there are flexible repayment options. You don’t have to worry about fixed monthly installments (EMIs) here. Instead, you can pay off the principal amount at the end of the tenure while you continue to pay the interest amount at regular intervals. This is incredibly advantageous for those who might struggle with strict repayment schedules.

Another fantastic benefit is that your FD continues to earn interest. Just because you've taken a loan against it doesn't mean that the FD stops growing. So, while you make use of the loan for immediate financial needs, your savings continue to grow at the agreed interest rate, thus ensuring that your long-term financial goals remain unaffected.

Lastly, yet importantly, there are zero prepayment penalties. If you manage to collect the sum before the due date, you can repay without incurring any charges. This is unlike other types of loans where prepayment almost always entitles you to a penalty.

Points to Keep in Mind While Applying for a Loan Against FD

While the benefits of availing a loan on FD are multiple, it is crucial to keep certain points in mind. Although the loan can be up to 90% of the FD amount, it depends on the institution's terms and conditions. Furthermore, the loan tenure cannot exceed the FD tenure. Lastly, you cannot claim tax benefits on the interest paid on such loans.

Conclusion

Securing a loan against your fixed deposit is not just a simple and convenient way to handle immediate fund requirements, but also a smart way of managing your finances. You can meet your short-term liquidity needs without disturbing your long-term financial planning.

Remember, different institutions might have slightly varying terms and conditions for loans on FD. Therefore, it is advisable to read all the terms properly before going ahead. So, next time you face a liquidity crunch, don't rush to break your FD. Instead, look for options to secure a loan on your FD and enjoy the multiple benefits it offers.