If you’re looking for a loan, you’ve probably come across the term “loan against deposit.” But what does it really mean?
A loan against deposit is a type of loan that allows you to borrow money using your deposit or savings account as collateral. The amount you can borrow will depend on the value of your deposit or savings account. The interest rate for a loan against deposit is usually lower than other types of loans because the collateral reduces the risk for the lender.
When it comes to loan against deposit, there are two main types – loan against fixed deposit and loan against recurring deposit.
Loan against fixed deposit
A fixed deposit (FD) is a type of investment where you deposit a lump sum of money for a fixed period of time, ranging from a few months to several years. The interest rate on FD is usually higher than a regular savings account. When you opt for a loan against a fixed deposit, you will be able to borrow money up to 90% of your fixed deposit amount.
For example, if you had a fixed deposit of Rs.1 lakh and needed to borrow money, you could potentially borrow up to Rs.90,000. The interest rate for the loan against fixed deposit is usually around 2% higher than the interest rate on the fixed deposit.
Loan against recurring deposit
A recurring deposit (RD) is another type of investment where you deposit a fixed amount of money every month for a fixed period of time, ranging from a few months to several years. The interest rate on RD is usually higher than a regular savings account, but lower than the interest rate on fixed deposits.
When you opt for a loan against a recurring deposit, you will be able to borrow money up to 80% of your recurring deposit amount. For example, if you had a recurring deposit of Rs.1 lakh and needed to borrow money, you could potentially borrow up to Rs.80,000. The interest rate for the loan against recurring deposit is usually around 2% higher than the interest rate on the recurring deposit.
Advantages of loan against deposit
There are several advantages of opting for a loan against deposit. Firstly, the interest rate is usually lower than other types of loans. Secondly, you do not need to provide any other collateral besides your deposit or savings account. This makes it easier to obtain a loan if you do not have any other assets to offer as collateral. Lastly, you can continue to earn interest on your deposit or savings account while it is being used as collateral for the loan.
Disadvantages of loan against deposit
While there are many advantages to opting for a loan against deposit, there are also some disadvantages. Firstly, you will not be able to withdraw the amount you have used as collateral until you have repaid the loan in full. Secondly, if you are unable to repay the loan on time, the lender has the right to liquidate your deposit or savings account to recover the amount owed. Lastly, if the interest rate on the loan is higher than the interest rate on your deposit or savings account, you could end up paying more in interest than you earn on your deposit.
Standard Practices
When it comes to loan against deposit, lenders follow certain standard practices to ensure that the process is fair and transparent. These practices include:
- Credit check – Lenders will look at your credit history to assess your ability to repay the loan.
- Eligibility criteria – Lenders will have certain eligibility criteria that you must meet before you can obtain a loan against deposit. For example, you may need to be a certain age, have a certain income level, or have a certain credit score.
- Interest rate – The interest rate for the loan against deposit will be based on the value of your deposit or savings account as well as your creditworthiness.
- Repayment terms – The repayment terms for the loan against deposit will vary depending on the lender. Some lenders may offer flexible repayment options while others may have fixed repayment schedules.
Read Also: Investment Power Unleashed: How to Unlock Capital with Loans Against Securities
Conclusion
A loan against deposit can be a good option if you need to borrow money and do not have any other assets to offer as collateral. However, it is important to understand the advantages and disadvantages of this type of loan before you decide to apply for it. Make sure to compare the interest rates and repayment terms offered by different lenders to find the best deal.
