We have all faced financial exigencies or a cash crunch when we need to harness our financial resources quickly. We resort to several mechanisms to raise cash, including breaking our fixed deposits to garner liquidity. But breaking fixed deposits results in the imposition of a penalty which reduces the cash resources available to us. The bank pays us interest at a much lower rate than the rate we entered into the FD.
Alternative solutions do not require anything as drastic as breaking a fixed deposit. You can opt for a loan against a fixed deposit.
In a loan against a fixed deposit, you are allowed to borrow against the security of your fixed deposit. The deposit is under lien to the lending institution until the loan exists. There are easy interest terms that include lower borrowing rates of interest compared to the market interest rates for loans. Also, the fixed deposit stays intact for the duration of the loan.The advantages of a loan against a fixed deposit include the following:
All categories of borrowers can borrow against offering the pledge of their fixed deposits. Minors and those who have invested in 5-year tax-saving deposits cannot avail of this facility.
Both residents fixed deposit holders and NRI deposit holders can avail of loans against fixed deposits.
Hindu undivided families, family trusts, partnerships, societies, and companies can all pledge fixed deposits.Repayment of the loan against a fixed deposit
The loan can be repaid in either instalments or a fixed lump sum. The only pre-condition is that the loan has to be repaid before the maturity of the fixed deposit.Fixed Deposit as collateral
As the fixed deposit is the collateral or security of the loan, in the case of maturity, if you are unable to repay the loan proceeds, the bank or the financial institution will recover the loan from the fixed deposit amount.