When you find yourself in a cash shortage situation, breaking your fixed deposit (FD) is one of the simplest ways to raise funds at short notice. Nevertheless, breaking an FD is seldom the best option. Instead, availing a loan against FD is a more prudent financial choice. It assists you in maintaining the maturity value of your deposit and meeting unexpected financial needs. This article discusses the most significant reasons for preferring a loan against FD over encashing it, especially with the inclusion of the loan against FD interest rate and its benefit.
1. Preserve Your Fixed Deposit Security
Fixed deposit is an investment with guaranteed return for you. Choosing a loan against FD maintains your interest benefit and FD value intact. Pre-withdrawing your FD, however, implies loss of interest as well as penalty. But in the case of choosing a loan against FD, the interest on your deposit continues to be credited, thus leaving you to gain from your saving in the long run.
2. Quick Liquidity Availability
One of the most important advantages of an FD loan is how easy and quick it is to get money. The procedure is straightforward, and banks or financial institutions can approve the loan in a jiffy since the FD is already collateral. This is therefore a good choice when you require liquidity urgently. The amount of loan, however, ranges from 70% to 90% of the FD value, and thus you are given enormous money without waiting.
3. Low Loan Against FD Interest Rate
Compared to other loans, e.g., personal loan or credit card advance, the loan against FD interest rate is relatively lower. This is because your FD is holding the loan secure, and thus the lender’s risk is low. The cost of borrowing loan against FD is usually 2-3% above the FD rate, which is low cost of borrowing. For the one who needs finance but doesn’t wish to increase the cost of borrowing, this is a good alternative.
4. No Adverse Impact on Credit Score
If you default on an FD, it may indicate that you are facing a financial crisis. Further, pre-maturity redemption of your FD damages your credit record. But taking a loan against FD does not damage your credit record since it is a secured loan. It is a concern which you have to consider in case you don’t want to forfeit or carry forward further creditworthiness. Since your FD is given as collateral, you are not committing any negative footprint on your credit record.
5. Flexibility of Repayment
Loans against FD provide you with the convenience of repayment. You can repay either in EMIs or even in a lump sum at the end of the loan period. All the major banks allow you to extend the repayment period of the loan, which can provide you with some relief in case of cash flow problems. The ease of terms makes loans against FD much simpler than other loans with rigid repayment terms.
6. No Credit Check Necessary
Unlike other loans where a credit history check is done, a loan against FD is a secured loan and hence the lender does not have to verify your credit score. This is extremely useful for individuals with poor or no credit history. The FD is collateral and thus no credit check is necessary, and it is a convenient source for most to borrow money without the additional expense of meeting stringent credit terms.
7. Maintain FD’s Tenure and Maturity Benefits
When you withdraw your FD prior to its maturity, you lose the rate of interest assured as well as a penalty you may have to bear. However, with the loan against FD, you are able to allow your FD to mature. Once you have cleared the loan, you can use the whole value at maturity as well as the interest which is a better offer if you are looking for returns on your FD over the long term.
8. No Further Documentation
Documentation is a very easy and straightforward process while availing a loan against FD. As the FD can be collateralized, lenders do not demand much documentation. In contrast to personal loans or other unsecured loans with tedious documentation and verification processes, availing a loan against FD is simple and time- and effort-saving for borrowers.
9. Ideal for Short-Term Financial Requirements
If your financial needs are temporary and you have an FD, a loan against FD is the correct option. A loan of this type can be repaid within a short period of time, and you will not lose the interest or the principal of your FD. The short-term nature of such loans renders them a correct option for fulfilling temporary financial demands.
10. Tax Relief on Interest
Even when the interest rate on loan against FD is zero, the interest earned on the FD remains taxable according to current tax law. However, loan against FD does not incur any extra tax charges. Hence, you continue to enjoy the tax benefits of the FD without any negative economic impact when you take a loan.
Conclusion
It is a preferable choice to borrow against FD instead of encashing your fixed deposit. It spares you from losing interest on your deposit, is penalty-free, and provides the liquidity at the present time at lower rates of interest. Moreover, the convenience of access to money without harming your credit rating or requiring much paperwork makes it a choice for the majority. The loan against FD interest rate is relatively lower than other loan options, making it an affordable solution for financial emergencies. If you’re looking for a flexible, cost-effective, and efficient way to access funds while protecting your savings, a loan against FD is undoubtedly the better option.
Also, there is repayment of loans against FD in EMIs or lump sum at your leisure since your FD is already working as collateral. There is no need for any credit check as your FD is already working as collateral, thus even when your credit score is low, this financial instrument becomes readily available for you.
In general, borrowing a loan against FD is one of the methods through which you can meet your financial needs without damaging your long-term savings. If you need money without withdrawing your investment, borrowing a loan against FD is the smarter and better choice.
