With lending rates rising steadily, you would think twice before taking any kind of loan. In fact, in case you really need the money, you would think of liquidating your assets first instead of paying high rates on a personal loan. But there is one asset that you wouldn't want to liquidate - fixed deposits (FDs).
You can now find a solution within the product without liquidating it. FDs give you the option of taking a loan against the secured amount and provide the overdraft facility, wherein you can withdraw more than your deposit. "Instead of breaking a high-interest FD, it's better to take a loan against FD," said Suresh Sadagopan, a Mumbai-based financial planner.
Why does it work for you?
Advantage over personal loan: While a personal loan can cost you around 20% per annum, loans against FD charge an interest rate that is a little higher than the rate you are earning on your deposit.
Advantage over liquidating FD: Even at the cost of 1-2%, it makes more sense than liquidating the asset. To liquidate an FD, most lenders will charge you a premature withdrawal penalty. Usually, the penalty for breaking an FD is 0.5-1% and it is applicable for the period the deposit has remained with the bank.
Suppose you have an FD of Rs 1 lakh for two years that earns 9.3% per annum and decide to break it after six months. If the 180-day FD has an interest rate of 7.0% and the premature withdrawal penalty 0.5%, you will get an interest rate of 7.0% minus 0.5%, or 6.5%, on your deposit. So at the end of six months, your interest would come to Rs 3,229 at 6.5%.
If you had remained invested for two years, your Rs 1 lakh would have grown to R1.2 lakh at the end of the tenor. But if you had taken a loan of Rs 90,000 at the end of six months at 10.5% and repaid the principal at the end of 1.5 years, you would have paid around Rs 15,280 as loan interest and the net interest income (total interest income minus cost of loan) at the end of two years would be Rs 5,555. So there is a profit, while the principal remains intact.
Watch out for
Right to lien: Most banks will not let you close the deposit when you are availing the loan. Moreover, some banks specify that they can use any other deposit that you may have in the bank to settle loan dues in case of a default. a
In collaboration with Mint.