Loan Against Fixed Deposit Disadvantages: Risks, Costs and When to Avoid

A fixed deposit (FD) is one of the most trusted savings instruments in India, offering security and assured returns. For those in need of quick liquidity, banks and financial institutions often allow customers to borrow against their FDs instead of breaking them prematurely. This option seems convenient and cost-effective at first glance, but it also comes with limitations and risks that borrowers must carefully consider. If you are exploring this option, understanding the loan against fixed deposit disadvantages is essential to make an informed decision.

Need urgent funds but worried about risks? Explore safer liquidity options with a loan against fixed deposit.

What is a loan against fixed deposit?

A loan against fixed deposit is a secured credit facility where your fixed deposit acts as collateral for borrowing funds. Instead of breaking your FD prematurely, you can pledge it to access liquidity while the deposit continues to earn interest. The loan amount typically goes up to 75% of the FD’s value, and the repayment tenure is capped by the FD’s maturity period.

This option is especially useful when you need quick funds for emergencies or planned expenses without disturbing your savings. Since it is backed by your FD, lenders usually offer faster approval, lower interest rates compared to unsecured loans, and minimal documentation requirements.

How does it work?

A loan against fixed deposit is a secured credit facility provided against your FD. Here’s how it functions:

• Loan value: Generally up to 75% of the FD amount.
• Collateral: Your FD acts as collateral; it remains intact until the loan is repaid.
• Interest rate: Charged slightly higher than the underlying FD interest rate (2% more).
• Tenure: Capped by the maturity date of your FD.
• Repayment: The repayment method in loan against FD is usually a bullet repayment.

Why do people opt for it?

Borrowers often prefer this option over unsecured credit because of its quick processing and relatively low interest. The reasons include:

• Instant liquidity: Quick access to funds without liquidating FD.
• Lower interest rate: Cheaper than personal loans or credit cards.
• Simple process: Minimal documentation, as banks already hold your FD.
• No credit score dependency: Approval is based on your FD, not credit history.
• Retains FD benefits: FD continues earning interest while you repay the loan.
   

Instead of breaking your savings, unlock liquidity with a flexible loan against fixed deposit.

Disadvantages of a loan against fixed deposit

While attractive on the surface, these loans have significant downsides. Here are the common disadvantages:

• Limited amount: You can only borrow up to 75% of the FD value, not the full.
• Tenure restrictions: The Loan cannot exceed the FD’s maturity.
• Hidden charges: There are no hidden charges 

Product limits and constraints: limited loan amount, tenure capped by FD term

There are product-level constraints you cannot overlook:

• Loan-to-Value (LTV): Usually up to 75%, restricting the amount you can borrow.
• Tenure limitation: Loan tenure cannot exceed the FD maturity period.
• FD lock-in: You cannot liquidate the FD freely until the loan is settled.
• No top-up flexibility: Unlike some unsecured loans, additional borrowing may not be possible.
   

Charges and hidden costs

Borrowers must also account for additional costs:

• Processing fee: Not applicable
• Prepayment charges: Not applicable as the repayment method is bullet repayment. 
• Penal interest: Not charged
• Other administrative charges: Maybe levied for documentation or account maintenance by some lenders.

While useful, this option is not ideal in every situation. Avoid it when:

• Your need is small: Breaking FD might be cheaper for small amounts.
• You require a long tenure: The loan term is limited by FD maturity.
• You are unable to repay comfortably: Risk of losing FD is high.
• You already have low-cost alternatives: Other credit lines may prove better.
• Emergency liquidity: Pre-closure of FD can sometimes be quicker and cheaper.

Alternatives: Loan against FD vs Break FD vs Personal loan vs OD

How to minimise the disadvantages of loan against FD?

You can reduce the downsides by planning carefully:

• Borrow only what is needed: Avoid over-leveraging your FD.
• Compare charges: Check fees before applying.
• Choose the right FD tenure: Align your funding requirement and FD maturity.
• Evaluate alternatives: Compare personal loans, ODs, and FD breaking before deciding.

Plan smartly to reduce risks and enjoy flexible access with a loan against fixed deposit.

Eligibility, documents and process for loan against fixed deposit

Getting a loan against FD is straightforward. Here is how:

• Eligibility:
  • Must hold an active FD with the lender.
  • Both individuals and businesses can apply.
  • Some banks require a minimum FD value.
• Documents required:
  • KYC Documents only if re-KYC is due for the loan application form.
• Process:
  • Submit the application to your FD-holding entity.
  • Sign the loan agreement/application form.
  • Loan is sanctioned within hours to days, depending on the lender.

Conclusion: Should you take a loan against fixed deposit?

A loan against FD offers quick liquidity at a lower cost than personal loans, but it is not without limitations. The loan against fixed deposit disadvantages include capped loan amounts, tenure restrictions It is suitable only when you require medium liquidity and can repay comfortably within the FD term. If breaking the FD or exploring other loan options proves more cost-effective, those should be considered first. Ultimately, the choice depends on your urgency and financial discipline.
 

Make the right borrowing decision today with a safe and convenient loan against fixed deposit