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
maturity.
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%. 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]
No paperwork
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.
Disclaimer: The Source, a content creation and curation firm has authored this article.
Axis Bank does not influence the views of the author in any way. Axis Bank and The Source 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.
