6 MinsSep 08, 2022
Ashish Rao, 41, is a lawyer specialising in real estate matters. After working for a reputed law firm for over a decade, he decided to branch out independently. He took a nice office on a long lease and was in the process of doing up the interiors.
Since he had planned this move for a while, he had set aside a sizeable amount for this purpose. But as it often happens in interior decoration projects, his expenses overshot his budget. Ashish thought of liquidating some of his Fixed Deposits (FDs) and spoke to his Axis Bank Relationship Manager (RM). The RM suggested that Ashish should take a loan against them instead of liquidating his FDs. He explained the advantages of such a step.
What is Loan Against FD?
A loan against FD is when you borrow a part of the sum held in a Fixed Deposit with your bank without actually liquidating
the FD. There are multiple advantages to doing so.
No need to pay a penalty
Premature liquidation of an FD attracts a penalty. It also involves loss of accrued interest. This can be avoided if you borrow against the FD instead, which will continue to accrue interest till
Lower Interest Rate
A loan against FD is secured by a Fixed Deposit. This means that if the borrower doesn’t repay the loan, the bank will recover the pending amount from the FD. However, because the loan is secured,
the interest rate charged is much lower than taking a personal loan or business loan. Typically, interest rates for
such loans vary between 12-18%. Loans against FD interest rates, however, are much lower – typically 2% more than the interest received on the FDs. The RM
explained how it works. She pointed out that the various FDs that Ashish held with the bank had an interest rate ranging from 5-2.5% (depending on their tenure). If he borrows against these FDs, he will be charged an interest rate ranging
from 7-4.5% (depending on which FDs Ashish borrows against).
But here is the beauty of the instrument. The Bank will only lend up to a maximum of 85% of the FD amount. Since Ashish’s FD of Rs. 100,000 continues to earn interest
of 5%, and he has to pay an interest of 7% on a loan of Rs. 85,000 (85% of Rs. 100,000), here is how the effective interest rate calculations work:
FD amount – Rs. 100,000
Interest rate – 5%
Annual Interest earned
– Rs. 5,000
Loan Amount – Rs. 85,000
Interest Rate – 7%
Annual Interest on loan – Rs. 5950
Effective interest outgo (Interest paid on loan – Interest earned on FD) = Rs. 5950 – Rs. 5000
= Rs. 950.
Effective interest on the loan of Rs. 85,000 (Effective interest outgo divided by loan amount) = Rs. 950 / Rs. 85,000 = 1.1%
This is, by far, the cheapest debt available!
[Also Read: New to investing? Here’s why you should look at bank FDs]
Since Ashish is already a customer of the Bank, his KYC details are already updated. Since a loan against a Fixed Deposit is a secured loan, he doesn’t need to furnish any income details.
No EMI and no penalty
A loan against a Fixed Deposit is co-terminus with the FD. This means that the tenure of the loan is the same as the tenure of the FD. Because of this, there are no EMIs (equated monthly instalments)
involved and no pre-payment penalty. Ashish can pay off the loan any time he chooses. Interest is charged on actual amount utilized and for the tenure of utilization.
The RM, however, advised Ashish that if he required a loan for a tenure
that was longer than the maturity period of his FD, he should, perhaps, look at taking a personal loan or business loan.
Axis Bank Loan Against Fixed Deposits come with many exciting features. You can also know more about interest rates on deposits or use Axis Bank’s FD calculator.
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