Fixed Deposit Interest Rate Hike – Should You Take a Loan Against FD or Break It?
A fixed deposit, commonly known as an FD, is an investment vehicle offered to customers by banks and non-banking financial institutions (NBFCs) to assist them to save money. With a Fixed Deposit account – you can invest a large sum of money at a fixed rate of interest for a set period of time. You receive the lump payment plus interest at the end of the term, which is an excellent money-saving strategy. Banks provide varying rates of interest on fixed deposit accounts.
You can make a fixed deposit for as little as 7-14 days and as much as ten years. This is why an FD is also known as a term deposit. When you start a fixed deposit account at a set interest rate, you are guaranteed that the rate of interest will remain constant, regardless of market volatility. According to your preference, the interest you earn is paid at maturity or on a recurring basis. You are not permitted to withdraw the funds before the maturity date. You must pay the penalty if you do so.
Break Your FD, or Take a Loan Against It?
We frequently require money immediately but do not want to borrow it at a high-interest rate. That occurs when we require finances for a short-term demand. A loan against fixed deposit (FD) is a form of loan issued by banks and financial organizations in India that allows people to borrow money against their fixed deposit account. In most cases, the loan amount is a percentage of the value of the fixed deposit account.
Before you run around to check the loan charges and more, you might also want to consider the interest rate.
Here is a real-time example of this.
Just imagine you have an FD with Axis Bank, it has reached its maturity, but the Axis FD interest rates just went up, and the loan rates against the FD are low. What would you be considering? In a puzzle? This is why you would have to look at both sides.
But here are the futures of a loan against your FD:
- Loan amount: The loan amount granted by banks against FDs typically ranges from 70% to 90% of the fixed deposit’s value. The actual proportion may differ from one bank to the next.
- Interest rate: The interest rate offered on a loan against an FD is typically lower than the interest rate charged on other types of loans, such as personal loans or credit card loans. The interest rate could be 1% to 2% greater than the interest rate on the FD.
- Repayment: The loan against FD is typically repaid through EMIs (Equated Monthly Installments). The EMI is computed using the loan amount, interest rate, and loan tenure.
- Penalty: Prepayment of the loan against the FD may result in a penalty fee. The penalty cost may differ from one bank to the next.
- Documentation: The documentation needed to obtain a loan against a fixed deposit is low. The fixed deposit receipt, a loan application form, and identity and address proof documents must all be submitted by the individual.
- Tenure: The loan’s tenure is often shorter than the fixed deposit’s tenure. Depending on the bank and the loan terms and circumstances, it can range from 7 days to 5 years.
- Loan disbursement: If the loan application is approved, the loan amount is usually disbursed within a few days.
- Interest Rate: The loan against the FD will generate interest while the FD continues to earn interest. The interest earned on the FD will be less than the loan interest rate.
- Eligibility: The eligibility criteria for obtaining a loan against an FD may differ from one bank to the next. In general, the person must be a resident of India and have a fixed deposit with the bank.
So, the smarter choice would be to not break off your FD; instead, keep it going.
What to Do Instead of Breaking Off Your FD?
There are solutions that do not require you to break your FDs while yet meeting your immediate demands. They are as follows:
- You can obtain short-term liquidity by borrowing against your FD Account. The maximum amount you can borrow is 90% of your FD account balance. In addition, the loan’s interest rate is often lower than that of a standard loan. Your credit score is not considered because your fixed deposit serves as collateral.
- You can divide your money into multiple pieces and create distinct FDs from them. You wouldn’t have to rely on a single deposit this way. You do not have to break your entire FD if you need to access a lower quantity than the value of your FD.
- Choose a credit card over an FD. SBI and SBM Bank (India) Ltd., for example, provide attractive credit card choices with a minimum FD amount of Rs. 25,000 and Rs. 12,000, respectively. These cards are issued in conjunction with your FD. These cards also aid in the development of a strong credit score.
It is never hard to make decisions like, “Should I continue my FD, or should I break it.” Do you know why? This is because, over here, no matter what your decision is – there is no risk to your money – just the difference between the amount of profit that you would be seeing.