Q. Suppose I have an FD with a bank. Then to meet the emergency need of money, should I break the FD or should I take a loan against that FD?
A. It depends. First, let us understand how ‘Loan Against FD’ works.
Any individual (not minor) having an FD (excluding 5 Year Tax Saving FD) with a bank, can apply for a loan against FD. Some banks may put a criterion against minimum amount of FD as well.
Maximum loan amount often ranges between 80 – 95% of FD amount. The interest is charged against the exact loan amount taken, and not against the entire limit. Loan tenure can be chosen but it cannot go beyond the remaining FD tenure. Interest charged is mostly 1 – 2% higher than the FD interest rate. The loan can be repaid through EMI (also known as Demand Loan) or just paying the interest amount monthly basis and paying the principal amount anytime within the tenure (also called Overdraft against FD). In most cases, foreclosure fee or processing fees are not charged.
Many banks, in today’s time, allow taking OD/Loan Against FD through their internet banking platform. Loan get processed almost instantly. It has nothing to do with the individual’s credit rating or CIBIL score as it’s a loan against collateral.
Q. Should I break my FD or should I take a loan against the FD?
A. It really depends on a few factors. It cannot be a straightforward ‘yes’ or ‘no’ answer.
When you break your FD prematurely, you may be offered interest rate for the term you remained in the deposit (and not the original contracted rate). There may be an additional penalty (1% approx). However, the penalty is only limited to interest (and not on the principal amount). When you calculate your net interest income on breaking an FD, you must also consider tax payable. After breaking the FD, you utilize the required amount and reinvest the rest amount in the prevailing interest rate.
On taking a loan you pay approx. 2% higher interest rate than FD (always pre-tax rate here) for the tenure of the loan.
If the amount you require, is a small portion of the FD amount; if the loan tenure is less; if the prevailing FD interest rate is much lower than before (when the original FD was made) – then taking a ‘Loan Against FD’ makes sense. In other cases, breaking the FD and reinvesting the rest amount after utilizing the required amount – makes more sense.