Loan Against FD: How It Works, Interest Rates, and Eligibility in India

A loan against FD is a secured loan that allows you to borrow money using your fixed deposit as collateral. This means that you do not have to close your deposit account to borrow the money. Whether you need to pay a medical bill, cover a unexpected expense, or have a cash flow crunch, you can keep your savings and still borrow the cash you need.

This article will explain to you how you can avail a loan against your FD, the interest rates that you can expect to pay, and who can avail this loan and if it is better than withdrawing your FD or availing a personal loan.

What is a Loan Against FD?

Loan Against FD is a secured loan offered by your bank where your bank will lend you money against your existing fixed deposit. Your fixed deposit is used as collateral in this case, and you won't be able to withdraw your fixed deposit until you repay your loan.

The amount of loan you can obtain is determined by your loan to value ratio, which is generally between 75% to 90% of your existing fixed deposit amount. If your fixed deposit amount is ₹2,00,000, you can obtain up to ₹1,80,000 as a loan.

This loan can be obtained as a term loan as well as an overdraft facility on your existing fixed deposit.

How Does a Loan Against FD Work?

The process is fairly straightforward. Here is what happens once you apply:

1. Lien is marked on your FD: The bank places a lien on your fixed deposit. This means the FD stays active and continues earning interest, but you cannot prematurely withdraw it until the loan is cleared.
2. Loan amount is determined: The bank calculates the eligible loan amount based on the LTV ratio and your FD's current value, including accrued interest in some cases.
3. Funds are disbursed: Once approved, the money is credited to your account, either as a lump sum (term loan) or as an overdraft limit you can draw from.
4. Interest is charged: The interest rate on a loan against FD is slightly higher than your FD interest rate, usually 1% to 3% above it. This makes it far more affordable than a personal loan.
5. Repayment: You can repay through EMIs, or if you have an overdraft facility, you can repay any time within the tenure and only pay interest on what you actually used.

Benefits of a Loan Against FD

There are several reasons why this option works well for most people with an existing FD:

• Lower interest rates: Since the loan is secured, banks charge lower rates compared to unsecured loans like personal loans.
• No credit score requirement: Your FD itself acts as the guarantee. Banks rarely run a credit check for this type of loan.
• Quick processing: With minimal paperwork and the FD already in the bank's records, approvals are often instant or same-day.
• FD keeps earning: Your deposit continues to accrue interest throughout the loan period. You are not losing out on your returns.
• Flexible repayment: You can opt for EMIs or use the overdraft facility to manage repayments at your own pace.
• No prepayment penalty in most cases: Many banks allow you to close the loan early without extra charges.

Interest Rates and LTV Ratio

The interest rates for loans against fixed deposits range from the fixed deposit interest rate plus 1% to 3%. The loan rate will range from 8 percent to 10 percent when your fixed deposit earns 7% per annum.

Cumulative FD: Interest compounds and is paid at maturity. If you have pledged this, the bank accounts for the final maturity value when setting the loan limit.

Non-cumulative FD: Interest is paid out periodically (monthly, quarterly, etc.). The loan limit is typically based on the principal amount.

Rates vary across banks, so it is always worth checking the specific terms before applying.

Eligibility Criteria

This facility is available to all individuals who currently possess a valid fixed deposit account in India. The following summary provides an overview of the process:

Salaried employees, self-employed workers, and retirees can all submit applications to individual FD holders.

• Joint FD holders: The standard procedure requires all joint holders to provide their agreement before any loans can be obtained.
• NRIs: Non-resident Indians who possess NRE or NRO fixed deposits can access these services, although different terms apply to each account type.
• FD type: Most standard fixed deposits obtain eligibility status. The tax-saver FDs, which require a five-year lock-in period under Section 80C, fail to meet eligibility requirements because their assets cannot be used as collateral or accessed before their scheduled ending date.

The application process permits first-time borrowers and individuals with short credit histories to apply because it does not require applicants to have excellent credit records.

Documents Required

Since this is a secured loan with your FD already in the bank, the documentation is minimal:

• FD receipt or certificate

• Identity proof (Aadhaar card, PAN card)

• Address proof (utility bill, passport, driving licence)

• Bank account details (for disbursement)

If you are applying at the same bank where your FD is held, the process is even simpler — most of your details are already on file.

How to Apply for a Loan Against FD

Here's how to take loan on FD. Applying is straightforward. Most banks offer both online and offline options:

Online Application:

1. Log in to your bank's net banking portal or mobile app.
2. Navigate to the loans section and select "Loan Against FD."
3. Choose the FD you wish to pledge and enter the loan amount.
4. Submit the request — approval is often instant.

Branch Visit:

1. Visit your nearest bank branch.
2. Fill in the loan application form.
3. Submit your FD receipt and required documents.
4. Receive sanction letter and disbursement within 1–2 working days.

Repayment Options

One of the more useful features of a loan against FD is how flexibly you can repay it.

• EMI Repayment: Pay fixed monthly instalments over the loan tenure, just like any other term loan.
• Overdraft Facility: Only pay interest on the amount you actually use. You can deposit money back into the overdraft account and reduce your outstanding balance any time.
• Bullet Repayment: Repay the entire loan at FD maturity, using the proceeds of the deposit itself. This works especially well if you took the loan to manage a short-term need and expect funds soon.

Loan Against FD vs Personal Loan

Here is a clear comparison to help you decide which option suits your situation better:

If you already have an FD and need funds quickly, a loan against FD is almost always the smarter choice. It costs less, processes faster, and does not affect your credit score negatively.

Should You Break Your FD or Take a Loan Against It?

This is a question many people face during a financial crunch. In most cases, taking a loan against your FD is the better decision. Here is why:

• Premature Withdrawal Penalty: Breaking an FD before its maturity date usually attracts a penalty, often a 0.5% to 1% reduction in the applicable FD loan interest rate. You lose a portion of your earnings.

• Lost Compounding: Once you close an FD, you lose the benefit of compound interest for the remaining period. Over a long FD tenure, this can be a meaningful amount.

• Loan Cost is Often Lower than the Penalty: The interest you pay on a loan against FD — say 2% above your FD rate, can sometimes be less than what you lose by breaking the FD prematurely, especially if you repay the loan quickly.

• Better Financial Planning: Keeping your FD intact gives you a safety net. The discipline of repaying a loan also tends to be better for long-term financial habits.

That said, if your FD is nearing maturity (within a month or two), withdrawing it might make more sense than going through the loan process. Use your judgement based on the timeline.

RBI Guidelines on Loan Against Fixed Deposit

The Reserve Bank of India (RBI) lays down broad guidelines that frame the way banks offer loans against deposits. Points to keep in mind:

• Lien Marking: The bank must mark a lien on the FD before offering any loan. This is a regulatory necessity and is for the benefit of both parties.
• DICGC Insurance: FDs up to ₹5 lakh are insured with the Deposit Insurance and Credit Guarantee Corporation (DICGC). However, this is only for the deposit and not for the loan.
• TDS on FD Interest: The interest on your FD, despite being pledged for a loan, is taxable. TDS is deducted on the interest received on your FD.
• Loans Against NRE/NRO FDs: RBI has framed guidelines for offering loans against NRE and NRO deposits. The only difference is in the repatriation of funds.

Conclusion

A loan against FD provides an efficient and budget-friendly solution for obtaining funds while maintaining your existing savings. The loan option provides lower interest charges than personal loans and does not require credit assessment while customers can continue earning interest on their deposit during the entire loan duration. The financial solution which allows customers to use their existing fixed deposits as collateral provides a better alternative than accessing unsecured credit or breaking their fixed deposit. Customers should evaluate different banking institutions by comparing their terms and reviewing current interest rates before submitting their applications.

FAQs on Loan Against FD

1. Can I take a loan against a joint fixed deposit?

Yes. Banks permit loans against joint fixed deposits too, but all the members of the joint account have to give their consent to pledge the FD. The first applicant will sign the loan agreement.

2. Is my credit score checked when I apply for a loan against FD?

In most cases, no. Since your fixed deposit is acting as collateral, banks do not check your credit score to give you a loan against FD. Hence, it is a safe option for you even if you do not have a credit score or your credit score is low.

3. What happens if I do not repay the loan?

In case you do not pay back your loan, the bank will have the right to break your fixed deposit to recover your outstanding loan amount. The remaining amount will be returned to you.

4. Can NRIs apply for a loan against FD in India?

Yes. NRIs holding NRE or NRO fixed deposits can apply for a loan against FD too.

5. Is a tax-saver FD eligible for a loan?

No. Tax-saver FDs under Section 80C come with a mandatory 5-year lock-in period and cannot be pledged or broken before maturity. They are specifically excluded from the loan against FD facility.

6. Can I take multiple loans against the same FD?

Generally, no. A bank can only mark a single lien against one FD. However, if you hold multiple FDs, you may be able to take separate loans against each of them, subject to the bank's individual terms.

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