WHY PREFER LOAN AGAINST FIXED DEPOSIT

The easiest and cheapest loans available for individuals from banks is loan against fixed deposit. But this advance remains the least utilized credit by consumers, which is a mistake that all retail borrowers deserve to be made aware of.

COSUMER DURABLE LOANS

While buying any household goods such as an air conditioner, washing machine, cooking range, furniture, TV, laptop or even expensive mobiles at least half of the consumers, if not more, would opt for consumer loans from banking or non-banking financial institutions or use their credit cards to finance the acquisition.

There is nothing wrong for those who don’t have that amount of money lying idle to use any form of credit. Otherwise, the wish would remain unfulfilled. In fact, that is the utility of financial lending, which enables an economy to grow on use of borrowed money in society.

MISTAKE OF BORROWERS

But it is a grave error on the part of borrowers to use such credit facilities instead of taking a simple loan against fixed deposit. One would often see people having a bank balance of 1 crore INR opting for a loan of 30,000 INR at an interest rate of 18%, while his deposits are earning between 7-8 % interest in banks.

HIGH COST OF CONSUMER LOANS

The consumer loans that one takes comes at a heavy price, which most of the borrowers either ignore or don’t realize. All lenders charge a processing fee of 1-3% of the loan amount, with an additional 18% GST billed to amount. Interest rates vary from 12-22% depending on the profile of the individual and the lending institution.

LOWER COST

On the other hand, banks usually lend 85% - 90% of the term deposit principal amount and the loan rate of interest is 1-2 percentage points higher than what the deposit is earning. This makes a huge savings on interest outgo as the differential rate between normal loans and loans against FD are in the range of 4-14% of the borrowed money. Moreover, there is also no processing fees payable and interest is payable only on the amount disbursed for the number of days used. Neither is there any pre-closure charge.

WRONG PSYCHOLOGY

Most people have a wrong psychology that buying products on credit ensures they don’t have to touch their savings, and the borrowed amount can be repaid through future family expenses.

What they fail to realize is the FD is not to be broken but only pledged as a collateral. For those having several such deposits, pledging one deposit receipt does not matter as they can always access other deposits, if emergency requirements arise. Thus consumers end up paying far more interest and other charges by not exercising this option.

OUR ASSUMPTION

It would be foolish to think that anyone willing to buy an expensive product ranging from 20,000 INR to 2,00,000 INR would not have just that amount of Fixed Deposit. It would be equally naive to assume a person have a savings of 30,000 INR would aspire to buy a product worth 1 lac INR.

In fact, most of the affluent and non-affluent middle class have a reasonable to adequate amount of savings in bank. Thus, it is always prudent for them to take a loan against Fixed Deposit than opting for a personal or consumer loan to finance household requirements.

LONGER PROCESSING TIME

Standard retail loans take a longer time to be sanctioned because profile verification and eligibility criteria check have to be done. Hence, these are not instantly sanctioned and applicants have to wait for a few days.

Another issue may be one’s income eligibility criterion. People who don’t file income tax returns or don’t meet certain earning thresholds can’t apply for such loans.

QUICK DISBURSAL

Since the bank is lending against your own money held with them, no credit appraisal is done as it is a very default-proof loan for the lender. One simply has to surrender the term deposit receipt and submit the properly filled loan request form with the same bank branch where the deposit is held. The loan is sanctioned and disbursed within a few hours.

EMI REPAYMENT

So once you start enjoying the new gadget with a consumer loan or return from a holiday with a personal loan, then begins the compulsion to pay EMI every month. If you default on any of your obligations, then heavy penalties await you, and possibilities of hidden charges being imposed are also there.

FLEXIBILITY OF REPAYMENT

Another great advantage of loan against FD is the flexibility of repayment. One can repay the loan accruals in parts or in full prior to the maturity date of the term deposit. And one can pay any amount as part payment multiple times, as and when the borrower has cash flow. There is no fear of default or missing out on any EMI and the penalties involved therein. If a borrower has not repaid a penny of that loan, then the entire outstanding is adjusted on maturity of the deposit without imposition of any penalties.

WHY BANKS’ DON’T PROMOTE THIS CREDIT

Although, loan against FD is the safest asset for banks since it lends you 85-90% of your money held with them, it hardly promotes this product. Whenever you approach your bank stating that you need a loan to buy any consumer durable or even for personal expenses, they would insist you to opt for a consumer durable loan or a car loan or personal loan.

The simple reason is loan against FD fetches very little for banks compared to other forms of credit. It earns interest only for the period for which your credit was in operation. There is no scope to earn any processing fee, or any penal charges for default of an EMI or two.