Disadvantages of Loan Against Fixed Deposit (FD)

9 min read • Published 23 October 2022
Written by Anshul Gupta
loan against fixed deposit disadvantages

Fixed deposit (FD) is an investment option with assured returns, making it a popular way of investing for many individuals with a low-risk appetite.

Almost all public sector and private sector banks offer FD accounts. Furthermore, many banks allow their existing customers to open FD accounts instantly through their net banking facility, making fixed deposits one of the most accessible investment instruments.

Most banks offer loans against FD accounts. It means that in times of financial difficulties, you can avail a loan against your FD instead of prematurely withdrawing it. A loan against an FD usually has a lower interest rate and is accessible to anyone, regardless of their credit score.

However, the question remains, does taking out a loan against FD always make more sense than withdrawing it all together? While there certainly are some advantages of availing a loan against an FD (some of them mentioned above), in this article, we are going to discuss the key disadvantages of taking  a loan against a fixed deposit.

Also Read: Credit Card Against FD: Features, Eligibility and More

What is Loan Against FD?

A loan against fixed deposits is a type of secured loan where the bank uses your fixed deposit as collateral to sanction the loan. It means that your FD balance determines the loan amount. Generally, banks approve loans up to 90 to 95% of the FD amount. A loan against FD is an alternative to premature withdrawal of your FD.

Eligibility

  • Any FD account holder, including individual holders with a joint account, can avail of a loan against a fixed deposit.
  • 5-year tax-saving fixed deposits cannot be pledged as collateral for a loan.
  • FD accounts opened in the name of minors cannot be pledged as collateral to secure a loan.

Benefits

  • You can apply for a loan against the fixed deposit account regardless of your credit score. Banks typically offer 90 to 95% of the FD amount as a loan.
  • Interest rates for loans against FD are lower than other type of loans, like personal loans, credit card loans, etc. Depending on the bank, it can be anywhere between 0.5% to 2% higher than the interest rate that you get on FDs.
  • NRIs are also eligible to apply for loans on their NRE/NRO FDs.
  • For most banks, there are no processing fees involved.
  • It may require little to no paperwork. Additionally, some banks offer online loan applications through their net banking services.
  • You can pay your loan back in instalments or as a lump sum. However, the repayment has to be made within the FD tenure. (This type of loan does not have a separate term, it follows the same tenure as your FD.)

Also Read: Experience financial growth with unmatched Bajaj Finance FD Rates

Disadvantages of Loan Against FD

While a loan against a fixed deposit allows you to meet short-term financial needs without premature withdrawal, it still has the following disadvantages.

  • Since you are using your fixed deposits as the collateral for your loan, if you do not repay, the bank can enforce the foreclosure of your FD account to recover the loan amount. It means not repaying the loan can lead to the loss of FD investments, including the interest income.
  • This type of loan does not have a separate tenure. It shares the same duration as your fixed deposit account.
    Therefore, if the maturity date of your FD account is nine months, the maximum tenure of the loan can be nine months.
  • Taking a loan against fixed deposits is not always the best option, especially when you are unsure about your ability to repay it. Also, defaulting on the FD loan can harm your credit score. In some instances, paying the penalty for premature withdrawal would be better than not being able to repay the loan amount on time.

Also Read: Know About Loans Against Mutual Funds

Interest Rate on Loan Against FD

Listed below are the interest rates on loans against FD offered by some of the prominent banks in the country. We have also mentioned the premature withdrawal penalty to help you make an informed decision.

Name of the BankLoan Interest RateLoan AmountType of LoanPenalty for Prematurely Withdrawing Funds from FD
State Bank of India1% above your fixed deposit rate.Up to 95% of the value of the fixed deposit.Demand loan & overdraft0.5% Interest rate for FD up to Rs 5 lakh.
1.0% for FD above Rs 5 lakh.
Bank of Baroda1% above your fixed deposit rate.Up to 90% of the value of the fixed deposit.Demand/ term loan/overdraftThere is no penalty on deposits up to Rs. 5 lakh if they are held for a minimum of 12 months. If not, there is a 1.0% penalty on FDs below Rs.1 crore.
1.5% Interest rate for FD above Rs.1 crore.
Punjab National Bank0.75% above your fixed deposit rate.Up to 90% of the value of the fixed deposit.Overdraft1% of the FD interest rate.
Central Bank of IndiaAs determined by the bank.Up to 90% of the value of the fixed deposit.OverdraftNo penalty on deposits up to Rs. 5 lakh.
1.0% for FD above Rs 5 lakh.
ICICI BankAs determined by the bank.Up to 90% of the value of the fixed deposit.Overdraft0.5% Interest rate for FDs invested for less than a year.1.0% interest rate for FDs invested less than five years or more than one year.
HDFC Bank2% above your fixed deposit rate.Up to 90% of the value of the fixed deposit.
(Minimum Rs. 25,000).
Overdraft1% of the FD interest rate.
Axis Bank2% above your fixed deposit rate.Up to 85% of the value of the fixed deposit.
(Minimum Rs. 25,000).
Overdraft1% of the FD interest rate.
(No penalty on first partial withdrawal of up to 25%).
Kotak BankAs determined by the bank.Up to 90% of the value of the fixed deposit.Overdraft0.75% of the FD interest rate.
Citibank2.5% above your fixed deposit rate.Up to 90% of the value of the fixed deposit.
(Minimum Rs.1 lakh)
Overdraft1% of the FD interest rate.
(If the present interest rate is higher than the contracted FD interest rate, there will be a 1% interest penalty plus the difference in interest rate.)Example: If your fixed deposit has a 6% interest rate and the bank currently offers a 6.5% interest rate, the bank will charge you 1% plus 0.5%.)
Union Bank of IndiaAs determined by the bank.Up to 90% of the value of the fixed deposit.Overdraft1% of the FD interest rate.
Yes Bank1% above your fixed deposit rate.Up to 90% of the value of the fixed deposit.
(Minimum Rs. 10,000)
Overdraft0.5% Interest rate for FDs invested less than or equal to 181 days.0.75% interest rate for FDs invested more than 182 days.
Disclaimer: The interest rates mentioned are subject to change as per the prevailing repo rate and the bank’s policy.

Also Read: Premature Fixed Deposit Withdrawal

Final Thoughts

FDs are one of the most preferred investment options for many, and loans against fixed deposit accounts are convenient since banks typically sanction them regardless of the account holder’s income, profession, and credit score.

Since this is a secured loan against your fixed deposit, banks usually charge lower interest rates than other types of loans. However, obtaining a loan against fixed deposits isn’t always a good idea, especially if you can’t repay the loan within the same term as your FD. So, decide based on the loan interest rate, FD tenure, FD early withdrawal penalty, and repayment capacity.

FAQs

What is the interest rate on a loan against FD?

Depending on the banks, it may range between 0.5% to 2% above the FD interest rate.

Can I apply for a loan against FD online using net banking?

It depends on the bank where you have your FD account. Most banks offer FD overdraft facilities through their net banking portals or apps.

How much loan can I get from SBI on FD?

SBI offers up to 95% of the fixed deposit value as a loan amount.

What happens if the loan against FD is not paid?

Your fixed deposits serve as collateral, so if you don’t repay the loan, the bank may foreclose your FD account to recover the amount. It means unpaid loans can lead to loss of FD investments, interest payments, and a negative impact on the credit score.

Are senior citizens eligible for a loan against a fixed deposit?

Yes, senior citizens are eligible for an FD loan. Any adult with a fixed deposit account can pledge it as collateral for securing loans. For some banks, however, there is a lower age limit with regard to who can avail a loan against FDs.

Are Non-Resident Indians (NRIs) eligible to take out a loan against a fixed deposit?

Most banks offer FD loans to non-resident Indians via their NRI net-banking services.

Is a loan against FD a good option?

The interest rate for a loan against FD is lower than other loan options. Furthermore, there are no processing fees involved.

Simply put, a loan against FD can be a good idea when you have a long FD tenure and need a small advance to meet short-term financial needs.

On the other hand, withdrawing FDs may be a better option if you need a substantial loan on your FD but are unsure of your ability to repay it.

Is taking a loan against a fixed deposit good?

Taking a loan against an FD is helpful in times of emergency. It allows the borrower to maintain liquidity & avoid breaking the FD pre-maturely.

Is it good to take an overdraft against FD?

An overdraft against FD is a better option. You only have to pay significantly lower interest rates and will have time till the end of the maturity period of the FD to repay the payment. You can prepay without any additional charges as well. 

Which type of deposit loan against FD is not allowed?

A loan against a Fixed Deposit under the name of a minor is not allowed. Also, you cannot get a loan against a 5-year Tax-saving FD.

What is the difference between an overdraft and a loan against FD?

On a loan against FD, the interest is charged on the whole amount, whereas, in an overdraft, the interest is charged only on the utilised amount.

Is a loan against FD secured or unsecured?

The loan against Fixed Deposit is considered secure because the FD here acts as collateral, and the loan amount is a percentage of the FD’s value.

Will I continue to receive interest from the bank if I take a loan against the FD?

Yes, the bank will offer you interest on your FD if you take a loan against it.

Was this helpful?

Anshul Gupta

Co-Founder
IIT Roorkee Alumnus and CFA with experience of structuring debt products worth more than 15000Cr for institutional and retail investors.

Popular Articles

Sovereign Gold Bond 2023-24: Series 4; Check Price, Issue Dates, and More.
Sovereign Gold Bond 2023-24: Series 4; Check Price, Issue Dates, and More.
  • 12 min read
  • 15 June 2023
What Are Gold BeES and How Do They Work?
What Are Gold BeES and How Do They Work?
  • 6 min read
  • 12 January 2023
Difference between Visa Classic, Platinum, Signature and Infinite Cards
Difference between Visa Classic, Platinum, Signature and Infinite Cards
  • 6 min read
  • 29 March 2023
How to File a Complaint with the Banking Ombudsman: A Step-by-Step Guide
How to File a Complaint with the Banking Ombudsman: A Step-by-Step Guide
  • 12 min read
  • 28 February 2023
How to Check Mutual Fund Status with Folio Number
How to Check Your Mutual Fund Status with a Folio Number?
  • 6 min read
  • 6 December 2022

Recent Articles

Complete Guide on Online Bond Platform Providers (OBPP)
Complete Guide on Online Bond Platform Providers (OBPP)
  • 4 min read
  • 12 February 2024
NPS Withdrawal Online: Rules, Process, Taxation & Exceptions
NPS Withdrawal Online: Rules, Process, Taxation & Exceptions
  • 9 min read
  • 31 January 2024
Understand Exempt-Exempt-Exempt (EEE) In Income Tax In India
Understand Exempt-Exempt-Exempt (EEE) In Income Tax In India
  • 4 min read
  • 31 January 2024
Electoral Bonds: Meaning, Price, and Eligibility
Electoral Bonds: Meaning, Price, and Eligibility
  • 8 min read
  • 29 January 2024
Interim Budget: How Is It Different From a Union Budget
Interim Budget: How Is It Different From a Union Budget
  • 4 min read
  • 29 January 2024