Explore how FDs are gaining popularity, not only in saving but also in borrowing money!
Since the rate hike cycle began, FDs have become more lucrative. After all, who doesn’t want to put their hard-earned money into a safe and trustworthy investment option that promises good returns?
But did you know that FDs are not just a means of saving money? In fact, they have become increasingly popular as a way of borrowing money as well!
Yes, you read that right! The same fixed deposit that you thought was only for investing your savings can also help you with your financial needs in emergencies. And that’s exactly what people are doing these days.
Borrowers in India who have taken personal or unsecured business loans are turning to an alternative funding source – borrowing against their fixed deposits. According to a recent report in the Economic Times, this trend has been on the rise for the past few quarters.
So, what exactly is a loan against a fixed deposit? It is a secured loan where customers pledge their FD as collateral and get a loan in return. The loan amount depends on the amount deposited in the fixed deposit, which can go up to 90% to 95% of the deposit amount. For instance, if you have an FD of Rs 10 lakh, you can get a loan in the range of Rs 9 lakh. The balance remains in the fixed deposit account, and you will continue earning interest.
This borrowing trend has been gaining momentum in India, with RBI data indicating that the number of loans against FDs grew by 43% in the last financial year, marking a 10-year high.
It has also emerged as the fastest-growing retail loan product, resulting in an increase in the loan book of banks. As of February, the outstanding loan against the FD portfolio stood at Rs 1.13 lakh crore compared to Rs 79,349 crore a year ago.
Reason For Increase in Loan Against Fixed Deposits
Compared to other loan options, the interest rate for a loan against a fixed deposit is significantly low. According to Economic Times, Soumitra Sen, who oversees consumer banking and marketing at IndusInd Bank, the interest rate for an overdraft on fixed deposits is generally 1% to 1.5% higher than the FD rate.
For instance, SBI charges 1% more than the relative time deposit rate, allowing customers to borrow 8%-9%, which is much cheaper than a personal or business loan. Moreover, many banks offer attractive facilities to repay the dues.
One of the significant advantages of taking a loan against a fixed deposit is that you can retain your deposit while meeting your immediate cash requirements. This option has gained popularity as banks are comfortable lending against such deposits as these loans are linked to their savings or current accounts and are considered a low-risk asset for the bank.
However, according to Navbharat Times, it is important to note that these loans are only suitable for short-term needs and must be repaid before the FD matures.
That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!
*The article is for information only. This is not investment advice.