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This personal loan has benefits for you!

August 04, 2014 16:10 IST

This personal loan has benefits for you!

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Abhishek Agarwal

There are many benefits of taking a personal loan against a fixed deposit than just taking a regular personal loan. Read more to find out...

Managing liquidity is an important aspect of personal financial planning. Even individuals with good investment portfolios find it difficult to manage liquidity. A sudden requirement of cash can push an individual into a situation where s/he may have to sell her/his assets, sometimes at a discount to fair value. However if smartly used the traditional bank fixed deposits can come to rescue. The banks offer personal loans against bank fixed deposits, whereby one can raise short term money without breaking your fixed deposits.

Another advantage the borrower enjoys is the low interest rates as compared to other personal loans. Most banks offer personal loans at a rate of interest ranging between 16 per cent and 24 per cent. But a personal loan taken against fixed deposit ensures that you pay just 1 per cent more than the rate of interest payable on the fixed deposit.

For example, if a bank pays 9 per cent rate of interest on a three year fixed deposit, then the rate of interest payable on the personal loan raised against it would be 10 per cent.

This saves a lot of money which otherwise would have been paid as interest had it been a traditional personal loan backed by no security.

The author is Co-founder and Director Credit Vidya.

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Image: Picture used only for representational purpose
Photographs: Jayanta Dey / Reuters

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This personal loan has benefits for you!

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Personal loan against bank fixed deposit is easy to obtain and the process generally takes less than one day.

The individual has to submit application form duly filled, fixed deposit receipts and other documents such as pledge/lien letter, overdraft agreement as notified by the bank.

There is no prepayment penalty charged by the bank on the repayment of personal loans against fixed deposit.

Banks do charge a small processing fee while giving this loan. However, if you have a long standing relationship with the bank, the banks may choose to waive half the fees.

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Photographs: Uttam Ghosh/Rediff.com
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Banks offer generally 90 per cent of the value of the fixed deposit.

For example, if you have made a fixed deposit with a bank just one month back, the bank would be offering you a personal loan to the extent of 90 per cent of the amount you invested.

If the fixed deposit has already run for two years, then the bank would be comfortable lending you bit more money than the amount you invested, since some interest is accrued on it in the past two years.

Put simply, the amount of loan offered against a fixed deposit would be closer to 90 per cent of the value of the fixed deposit.

If the borrower fails to service the loan, the bank has the right to foreclose the fixed deposit to recover the money lent.

This also means that the tenure of the personal loan given against bank fixed deposit cannot exceed the residual tenure of the bank fixed deposit.


Photographs: Uttam Ghosh/Rediff.com
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Banks offer overdraft facility against bank fixed deposit. This enables borrowers to have access to liquidity. The borrower can use funds for short period of time and repay the money much before the last date.

This way s/he pays interest only for the time s/he has availed cash from the bank.

For example, assume that an individual has a fixed deposit of Rs 1 lakh. Bank has approved credit limit of Rs 90,000 against this FD and the tenure is 15 months. If s/he draws Rs 50,000 on first of the month and then repays the money on the 17th of the month, then s/he is supposed to pay the interest on Rs 50,000 availed for 17 days only.

The points to note while you take loan against fixed deposit is that it should be free from lien or encumbrance and the deposit should not be in any minor's name.

If this deposit is in joint name, say of husband and wife, all holders of the deposit have to execute the loan document. The liability to repay the loan will lie with all holders of the deposit.

The deposit holder will continue to receive interest on the underlying deposit, however, they have to service the EMI on the loan against deposit.

Personal loan against fixed deposit can help you in times of liquidity crunch. However you should be looking at it as a means to raise short term money.

If you go overboard with a personal loan against fixed deposit, and cannot repay on time, you stand to lose your bank fixed deposit, as the bank forecloses the bank fixed deposit to recover money lent.

Also it shows in your credit report, popularly known as CIBIL report. Such defaults can pull your CIBIL score down. So use the facility of raising personal loan against bank fixed deposit responsibly.


Photographs: Rediff Archives
Tags: CIBIL , EMI

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