When you invest in a bank fixed deposit, you can easily get a loan against it without having to break it. This is similar to a personal loan. However, the loan is structured as an overdraft facility against your fixed deposits.
In case of a company deposit, you can borrow after three months of investing. In case of bank deposits, they generally vary from bank to bank. Certain banks, such as Punjab National Bank, allow loans from the very next day of making the deposit. Some like HDFC may even offer one after six months. You need to check with your bank on the same.
There is no specific tenure; you can avail of the loan till the deposit matures. If unpaid till maturity, the loan is adjusted against the fixed deposit proceeds. There are no prepayment penalties to foreclose the loan. There is no restriction on the end use of funds. It can be used to meet financial requirements, business, direct investment in India or for buying property.
Banks offer an overdraft facility against your fixed deposits.
You can also get a rupee overdraft against any of your non resident external (NRE), non resident ordinary (NRO) or foreign currency non residential (FCNR) account deposits.
What is the interest charged and the processing fee? Interest will be charged on the amount drawn and not the limit set. It is around 2-2.5 per cent over the fixed deposit rate. Say, you have a deposit of Rs 1 lakh earning an interest of 10.5 per cent a year. At 25 per cent margin, your overdraft limit is set at Rs 75,000. If you need Rs 30,000, you can withdraw it from the overdraft account at 12-12.5 per cent (2-2.5 per cent over deposit rate). The interest will be charged on Rs 30,000 and not Rs 75,000.
The processing fee charged for this loan is low compared to personal loans. Sometimes, banks waive off the processing fee. As this is a secured loan, the lender may or may not want to know if you have the cash flow to repay it.
How much can I borrow? You can either borrow against the entire deposit amount or according to your requirement. Banks offer a loan anywhere between 75 and 90 per cent of the deposit after maintaining a 10-25 per cent margin. The latter may vary with each bank and every customer. For instance, if you have a fixed deposit of Rs 1 lakh, you can borrow up to 90 per cent of the deposit amount with a margin of 10 per cent.
Are there any tax benefits? Salaried individuals cannot get tax benefits on the interest paid on loans against fixed deposits. Self-employed individuals using the funds for the purpose of business can deduct the interest paid as a business expense from their business income and pay tax on the remaining amount only.