Loan on Fixed deposits, is it cheaper for borrowers
While we invest in bank fixed deposits, several times we may need money either for urgent short term requirement or to buy something. In such cases we would generally break the bank fixed deposits and do not want to go for personal loans where the interest rates are very high. But do you know that instead of breaking fixed deposits, if we go for loan on fixed deposits, it would be cheaper?
What are the options provided by Bank?
If you have a bank fixed deposit and you need urgent money, generally banks suggest for overdraft facility or suggest for loan against fixed deposits.
Overdraft facility is one where you are facilitated to withdraw amount up to 70% of your bank fixed deposit. The interest on the overdraft would be 2 to 3% higher than the bank fixed deposit rate.
Loan against fixed deposit is one where a loan would be sanctioned to you up to 90% of your bank fixed deposit. 10% amount is kept as margin amount.
What would be the interest rates for loan against fixed deposits?
Loan against the fixed deposits interest rates would varies from bank to bank and it would be 2% to 3% higher than the bank fixed deposit. If your bank fixed deposit interest rate is 9%, your loan against fixed deposit would be charged with interest anywhere between 11% to 12%.
What is the tenure?
Tenure of such loan should be within the maturity of the bank fixed deposits. However if it is unpaid before the maturity of the bank fixed deposit, the loan would be adjusted against such fixed deposit proceeds.
Are there any processing charges?
Public sector banks are not charging any processing fees for such loans. Since there is no risk in issuing such loans, it is secured loan for banks. However private banks are charging small fees to process such loans.
How loans against fixed deposits are comparable with personal loans?
Interests on personal loans are between 16% to 28% depending upon the banks. On top of this, they would also charge processing fees from 0.5% to 1% on loan amount. However loan against the fixed deposit, the interest rates are ranging between 9% to 12%. Hence comparing to personal loans, loan on fixed deposit would always be better option.
To whom this would be suitable for?
Loan against fixed deposits would be best suitable for anyone who needs short term loans and who does not want to break their fixed deposits.
Do you get any tax benefits?
If you are salaried employee, you cannot get any tax exemption for the interest paid by you against the loan on fixed deposits. However if you are in business, you can show such interest as expenses and your tax liability would get reduced to that extent.
Conclusion: Loan on bank fixed deposits would be far better option than personal loan. Such loans comes with cheaper interest rates and with almost nil or low processing fees.
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