Is considering an FD as collateral a wise decision?

Fixed Deposits (FDs) are a popular investment option in India owing to their safety, guaranteed returns and fixed interest rates. However, many investors are unaware of the potential to use their FDs to meet urgent financial needs. Using FD as collateral, you can unlock significant liquidity without breaking your deposit. Let's discover the concept of FD collateral, its benefits, and how it can be a smart financial move.

What is FD as collateral?

Using Fixed Deposits as collateral is a type of secured loan where the FD guarantees the borrowed amount. If the borrower defaults, the bank can liquidate the FD to recover the loan amount. This benefits both the lender and the borrower as the bank has a low-risk loan, and the borrower retains the interest-earning FD.

For example, Axis Bank's Loan Against Fixed Deposit allows you to avail of a loan up to 85% of your FD amount. The loan process is quick, with minimal documentation, and you can continue earning interest on your FD while using it as collateral.

Why consider FD collateral?

Considering a Fixed Deposit as collateral can be a wise decision in many situations. Here's why:

1. Quick processing: Since the loan is secured by your FD, banks can approve and disburse it faster due to the minimal risk involved.
2. Retain FD benefits: When you take a loan against your FD, you continue earning interest. This means your investment continues to grow even as you borrow against it.
3. Security: Knowing you can meet financial needs without liquidating your investments provides security and peace of mind.
4. Flexible repayment options: You can choose repayment terms that suit your financial situation, whether regular EMIs or paying off the loan at the end of the FD term.

How to apply?

To avail of a loan against your FD, you need to follow these essential steps to apply for using Fixed Deposit as collateral:

1. Approach your bank: Contact the Axis Bank where you hold the FD.
2. Loan amount: The loan amount typically ranges from 70% to 90% of the FD value. This is known as the loan margin.
3. Interest rates: The interest rate on a loan against FD is usually 1-2% higher than the FD interest rates. For example, if your FD earns 6% interest, the loan interest rate might be 7-8%.
4. Repayment terms: The loan tenure can be up to the remaining tenure of the FD. You can opt for regular EMIs or repay the entire loan at the end of the term.

Benefits of FD as collateral in India

1. FD liquidity: By taking a loan against your FD, you can convert a non-liquid asset into a liquid one without breaking the deposit prematurely.
2. Fixed Deposit security: It provides a sense of security, knowing that your financial needs can be met without sacrificing your investments.
3. Bank Loan collateral India: Many banks in India offer this facility, making it widely accessible for FD holders.
4. Fixed Deposit guarantee: The FD remains intact and continues to earn interest, guaranteeing returns while serving as collateral.

Also Read: Top 5 reasons to open a Digital Fixed Deposit

Conclusion

Using Fixed Deposits as collateral for loans is a smart financial move. This approach provides you with liquidity and security, meaning you can access funds when needed without breaking your FD. Loans against FDs come with lower interest rates, quick approval, and minimal paperwork, making the process smooth and efficient. Overall, using your FD as collateral allows you to enjoy financial flexibility and meet your financial needs without compromising your investments.

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision