Is it Better to Borrow Loan Against Fixed Deposit Instead of Liquidating?
It is not a smart decision to liquidate your fixed deposit when you need money in an emergency. In this way, you are going to lose your interest rate and other benefits attached to your fixed deposits. To prevent yourself from the financial hassle as well as fulfill your need of cash, the bank provides the facility to avail the loan against fixed deposit. It ensures the benefit of the user and enables you to borrow a loan at comparatively lower rate of interest. The main benefit of this loan is that the user continues to earn interest on the fixed deposit even if the loan is sanctioned by the same bank having the customer FD in their branch.
Loan against the fixed deposit is a kind of short-term debt elevated rapidly from the existing resources. The amount of loan against FD depends on the amount of the fixed deposit. It can be no more than ninety per cent of the amount of fixed deposit. There is a slight difference between the rates of interest as compared to other types of loan. The tenure of the loan amount is parallel to the maturity period of the fixed deposit.
Instead of liquidating your investments, it becomes easy to take a loan against fixed deposit which is one of the best and cheaper options to borrow money during any sort of financial emergency. The interest rate of banks in fixed deposit is between 1 to 2.5 per cent greater than the existing rate of fixed deposit.
For instance, if you get interests on the fixed deposit at 7.5 per cent, then the bank will provide you with the loan against a fixed deposit at the rate of around 8.5-10 per cent. Your credit scores is not checked by the bank to approve your loan against FD and the documentation is quite stress-free. The customers with low credit score can also borrow loan against FD. In addition to this, there is no processing fee and you can also continue to earn interest on fixed deposit.
With an alternative of fixed deposit, there are some advantages and factors that play an important role. One of the big advantages is no pre-closure charges in a possible manner. For the lender, the fixed deposit works as a firm safety point. Immediate good level, as well as favorable posture, gets by the available amount and tenure for the amount. In the times of emergency, the flexibility and effective help will be provided while computing the rate of interest on loan against fixed deposit. A personal loan is relatively expensive as compared to the loan against FD. Moreover, the processing time is simplest and more rapidly than other available options. The structure of repayment of the loan is very easy and this loan is considered as the demand loan. Apart from the EMI, there is another alternative which is an overdraft option along with a renewable line. Last but not the least, ease of paying the interest is an amazing advantage with the loan against fixed deposit.
In case the fund requirement is permanent and / or the fund generation to recoup the deposit amount (and repay the loan availed) exceeds the deposit tenor, then it may be advisable to liquidate the fixed deposit. However, if the fund requirement is short term and the amount would be replenished within a short timeframe, it is most beneficial to avail overdraft facility against the deposit. It may be mentioned that even if the interest rate on the overdraft is higher by couple of percentage, the interest charged on the overdraft is only on the amount drawn and outstanding and only for the period for which the amount is availed. Thus, in case the requirement is short term, then avail loan against fixed deposit and when there would be fluctuation in fund requirement it is advised to take overdraft.
Financial needs changes day by day. It depends on the specified amount of money as well as the pressure of money whether you want to get loan sanctioned against fixed deposit or not. A loan against FD can be a smart option if you have corresponding amount of money available in your fixed deposit.
Thus, raising loan against Fixed Deposits (FD) is far better than liquidating it to meet your requirement of emergency fund.