How to use Fixed Deposits as collateral for Loans?

When you invest in Fixed Deposits, your money is locked in for a set period, earning steady returns. But what happens when you need quick funds without breaking your deposit? One of the most practical solutions is to use your FDs as collateral for a Loan. This method gives you liquidity while still allowing your deposit to earn interest.

What does it mean to pledge a Fixed Deposit?

Pledging an FD means placing it as security with a lending institution for a Loan or overdraft. Instead of breaking the FD and losing the interest benefits, you can borrow against it. In most cases, lending firms allow you to access up to 90% of the deposit’s value. The advantage here is that the deposit remains in your name and earns returns at the prevailing interest rate.

Meanwhile, you only pay interest on the borrowed amount. Since this is a secured arrangement, the interest on the Loan is generally lower than on unsecured loans, making it a cost-effective option.

Using a Fixed Deposit interest calculator

Before using your FD as collateral, it is wise to plan with a Fixed Deposit interest calculator. This tool helps you estimate the maturity value of your FD by factoring in the deposit amount, tenure, and interest rate. The calculator can show you how much you will accumulate at maturity.

By knowing the projected growth of your FD, you can decide how much to borrow against it without disturbing your long-term financial goals. It also helps you compare tenures and interest rates, making sure your strategy balances both liquidity and returns.

Steps to take a Loan against FD

1. Check eligibility: Only certain types of FDs are eligible. Tax-Saving FDs, for example, are usually not accepted as collateral.
2. Request lien placement: The lender will place a lien on the FD, which means you cannot withdraw it until the Loan is cleared.
3. Get the Loan sanctioned: Generally, up to 90% of the deposit value can be borrowed, either as a lump sum Loan or an overdraft facility.
4. Pay Loan interest: Interest is charged only on the amount you use from the overdraft or Loan, not on the entire FD value.
5. Repay on time: The Loan must be cleared before or along with the FD’s maturity. Once the lien is repaid, it is removed, and you regain complete control of the deposit.

Conclusion

Using your Fixed Deposits as collateral allows you to handle urgent financial needs without compromising the stability and growth of your savings. It is beneficial when you want quick funds but do not want to compromise on the steady returns from your FD. This way, you enjoy the dual benefit of maintaining your investment while also gaining access to liquidity at favourable terms.