A loan on fixed deposit is a popular borrowing option available for individuals who have a fixed deposit (FD) with a bank or financial institution. It allows depositors to access funds by pledging their FD as collateral without breaking the deposit. This facility offers convenient credit access at lower interest rates compared to unsecured loans. Understanding the essential terms, features, and loan against fixed deposit repayment tenure is critical for making informed borrowing decisions. This article explains how loans on fixed deposits work, their key features, important conditions, and the typical repayment structure relevant for Indian borrowers.
What Is a Loan on Fixed Deposit
A loan on fixed deposit is a type of secured loan where the borrower pledges their fixed deposit receipt (FDR) as security to the lender. The loan amount is usually sanctioned up to 90% of the FD value. The borrower continues to earn interest on the FD during the loan tenure while repaying the loan in instalments. Since the loan is backed by collateral, interest rates are comparatively lower than personal loans or credit cards. Banks and NBFCs provide this loan to help customers manage liquidity without prematurely breaking their term deposits.
Important Terms Related to Loan on Fixed Deposit
Loan Principal Amount
The principal loan amount is normally restricted to a percentage of the fixed deposit’s current value, commonly 75% to 90%. This ratio depends on the lender’s policy and the type of fixed deposit. Senior citizens may receive slightly higher percentages in some cases.
Interest Rate on Loan
The interest rate on a loan against fixed deposit is typically 1–2% higher than the FD interest rate. This keeps the loan affordable while compensating the lender for the risk. Usually, the FD interest rate acts as the base rate for determining the loan interest.
Tenure of Loan Against Fixed Deposit
The tenure of a loan on fixed deposit generally corresponds to the remaining tenure of the underlying FD. Since the FD is the collateral, the loan cannot extend beyond its maturity. Loan terms commonly range from 3 months to 36 months, depending on the balance duration left on the FD.
Loan Against Fixed Deposit Repayment Tenure
The repayment tenure structure of the loan varies by lender and may include monthly, quarterly, or bullet repayments at maturity. The loan against fixed deposit repayment tenure is usually aligned with the FD’s maturity, allowing borrowers to repay early in many cases without penalty and reducing the risk of default.
Foreclosure and Prepayment Charges
Some lenders allow premature repayment or foreclosure of the loan with minimal or no charges. This flexibility benefits borrowers who want to clear the loan early once their liquidity improves.
Documentation and Collateral
The only collateral needed is the fixed deposit receipt, and documentation is minimal compared to unsecured loans. This simplicity facilitates swift loan processing.
Features of Loan on Fixed Deposits
Lower Interest Rates
Because the loan is secured by the FD, the interest rate is significantly lower than that of personal loans or credit cards. This makes it an affordable credit option.
Easy Eligibility and Fast Processing
The presence of FD as collateral means banks require less scrutiny on credit history and income proof, leading to quicker approval and disbursement.
No Impact on Credit Score If Repaid on Time
Timely repayment of the loan on fixed deposit does not negatively affect the credit score. Since the loan is secured and low risk, lenders do not report defaults aggressively.
Continued Earning of FD Interest
Borrowers do not lose out on FD interest since the deposit remains intact with the bank. This contrasts with breaking the FD prematurely, where interest penalties may apply.
Flexible Loan Amount and Tenure
The loan amount depends on the FD value, and tenure aligns with the deposit maturity, allowing for well-suited repayment scheduling.
Eligibility Criteria for Loan on Fixed Deposit
- Indian resident individuals above 18 years of age
- Individuals having a fixed deposit with the lending bank or an accepted financial institution
- Minimum fixed deposit amount varies but generally starts at Rs. 25,000 or Rs. 50,000
- Satisfactory credit profile may be required if the loan amount is high
- Some lenders allow loan against joint fixed deposits with joint account holders as co-borrowers
Loan Against Fixed Deposit Repayment Tenure Structure Options
Monthly Instalments
Under this structure, borrowers repay principal and interest in fixed monthly instalments throughout the loan tenure, which usually matches the FD maturity. It is suitable for borrowers requiring a regular repayment schedule.
Quarterly Instalments
Some lenders provide an option to repay in quarterly instalments. This reduces the monthly cash outflow burden but increases the interest cost marginally.
Bullet Repayment at Maturity
The principal and interest are both repaid in full at the end of the loan tenure. During the loan period, the borrower pays interest only or capitalises interest, depending on the agreement. This option suits borrowers with irregular income or those expecting a lump sum inflow at a later date.
Prepayment and Part Payment Facility
Most lenders permit prepayment or part payment without penalties. Borrowers can reduce their outstanding principal whenever they have spare funds, lowering interest cost.
Advantages of Loan on Fixed Deposit
- Quick and hassle-free approval with minimum documentation
- Lower interest rates compared to unsecured loans
- No penalty on breaking FD as credit is raised against it
- Borrowers continue to earn interest on FD
- Flexible repayment options tailored to borrower needs
- No impact on credit utilisation ratio since funds are not drawn from credit cards or overdraft facilities
Disadvantages of Loan on Fixed Deposit
- The loan amount is limited to around 90% of FD value, which may be insufficient for large borrowing needs
- Loan tenure cannot exceed FD maturity period
- Interest earned on FD is taxable, and tax implications can be complex if FD is pledged for loan purposes
- Borrowers must continue to maintain the FD for loan security
- In the event of loan default, the bank has the right to encash the FD to recover dues
How to Apply for a Loan on Fixed Deposit
- Visit your bank or NBFC branch where you hold the FD
- Submit the fixed deposit receipt and loan application form
- Provide identity and address proof as required
- Disclose the loan amount needed (up to 90% of FD) and choose preferred repayment tenure
- Lender assesses and sanctions the loan, usually within 1–3 days
- Loan amount is disbursed through cheque or directly to your bank account
Conclusion
A loan on fixed deposit is a convenient and cost-effective credit solution for salaried individuals, self-employed professionals, and retirees looking to meet short-term financial requirements. By pledging an FD, borrowers gain swift access to funds at affordable interest rates without breaking their deposits. Understanding key terms like loan principal amount, interest rate, and especially the loan against fixed deposit repayment tenure helps borrowers manage repayments effectively. With flexible tenure options and low processing hassles, this loan product remains a preferred choice in the Indian financial market for secured lending. Using a loan on fixed deposit responsibly can support liquidity needs while preserving your fixed deposit investment and earning potential.