A loan against a Fixed Deposit (FD) can be a convenient option for individuals who need quick access to funds without breaking their FD. However, there are some disadvantages associated with this type of loan:
9 Disadvantages of Loan Against Fixed Deposit
- Higher interest rate on Loan: The interest rate charged on the loan against FD is generally higher than the interest earned on the FD itself. This means you end up paying more in interest on the loan than you earn on your deposit.
- Impact on returns: When you take a loan against your FD, the principal amount of the deposit decreases by the loan amount. As a result, the interest earned on the reduced principal amount will also be lower, impacting your overall returns on the FD.
- Partial withdrawal not allowed: When you take a loan against an FD, you cannot withdraw only a part of the deposit. The entire FD amount becomes collateral for the loan, so you lose access to the full sum until the loan is repaid.
- Early closure charges: If you need to close the FD prematurely to avail the loan, there may be penalties or charges imposed by the bank, reducing the effective amount available for the loan.
- Risk of default: If you are unable to repay the loan on time, the bank has the right to recover the outstanding amount by liquidating the FD. This could lead to the loss of your FD and the interest earned up to that point.
- Limited loan amount: The loan amount is usually capped at a certain percentage of the FD value (typically 80-90%), which may not meet all your financial needs.
- Processing fees and charges: Banks may levy processing fees or other charges for availing a loan against FD, which can add to the overall cost of borrowing.
- Impact on credit score: Failure to repay the loan on time can negatively impact your credit score, making it difficult to get loans or credit in the future.
- Opportunity cost: If you had invested the money in other more lucrative options instead of keeping it in an FD, you might have earned higher returns, which you forego when taking a loan against FD.
Overall, a loan against FD can be a helpful option in emergencies, but it’s essential to weigh the advantages against the disadvantages and consider other alternatives before making a decision.