In urgent cash needs, borrowers may find loans against fixed deposits more economical than unsecured personal loans, as banks offer lower interest rates due to reduced risk, making them an attractive short-term borrowing option.
An unexpected bill can force a quick choice between an unsecured personal loan and a loan against a fixed deposit. Zee Business noted that the second option can be cheaper because the bank already holds the deposit as security, so it faces less risk and can offer a lower rate. Industry comparisons from Moneycontrol show that loans against fixed deposits are often priced only a little above the deposit rate, which is why they are frequently among the least expensive forms of short-term borrowing.
In practice, the loan does not close the fixed deposit. The bank places a lien on it and lends against part of its value, while the depositor continues to earn interest on the original deposit. Federal Bank says customers can borrow up to 90% of the deposit value in some cases, while Axis Bank says its own facility can go up to 85% of the deposit amount. The precise limit depends on the lender and the type of deposit, but the basic structure is the same: the savings stay in place and the bank releases cash against them.
That difference can be material. Zee Business ran a comparison for a Rs 5 lakh loan over 24 months and found that, at an assumed 8% interest rate on a loan against an FD, the EMI would be about Rs 22,600 with total interest of roughly Rs 42,700. By contrast, a personal loan at an assumed 12% would cost about Rs 23,500 a month and generate nearly Rs 64,900 in interest. On those figures, the personal loan would cost more than Rs 22,000 extra in interest alone.
Still, the cheapest option is not always the best fit. Moneycontrol pointed out that personal loans are unsecured and therefore more flexible, while FD-backed borrowing is tied to money already parked with the bank. Federal Bank says its loan against deposit product carries no penal interest or processing fee, and DNS Bank says some lenders price such loans at just 1 percentage point above the deposit rate. For someone who needs fast cash but does not want to break a deposit, the loan against FD can preserve savings discipline and reduce borrowing costs at the same time.
Disclaimer: This article is intended to inform and educate, not to recommend or endorse any financial product, investment or strategy. Please consider your own financial circumstances and seek professional advice where appropriate before making financial decisions.
