Personal loan vs loan against Fixed Deposit: Which ones should you choose?

When should you apply for personal loans? Image Source: flickr.com

Managing your money is one of the most crucial aspects of personal finance. Managing your cash flow requires a disciplined financial lifestyle that involves many carefully measured steps and prudent decisions. Ups and downs are a part of life; however, one can never be too prepared for an unforeseeable worst. Managing liquidity, savings and investment are different ways to help you lead a better financial future. There can be a sudden need of money and in case if you don’t have immediate cash, borrowing a loan or selling your assets may be the only options left in this case. During such situations, you can avail a standalone personal loan or a loan against your fixed deposit. However, are you aware when to choose what as a better option? In this article, let us quickly understandably about personal loan and when we avail them versus that of fixed deposit loans. This will not only broaden your options during unprecedented times but also help you opt the ideal one for your needs and requirements.

What is a Standalone Personal Loan?

Personal loans are generally availed while trying to alleviate financial difficulties or even when you want to supply for an expensive venture. These loans are customarily repaid in monthly installments over a tenure of typically two to seven years. However, they may take longer depending on the circumstances, or even your financial institution since standalone personal loans are unsecured loans not backed by any collateral. This is why they have higher rates of interest as compared to loans taken against fixed deposits. A secured loan needs to be supported by collateral and is relatively cheaper; however, you can lose the asset if you default. With a standalone personal loan, you will receive the loan amount with fixed monthly payments over a secured repayment tenure.

What is a Loan Against Fixed Deposit?

A loan against fixed deposit is a secured loan where applicants can pledge their fixed deposit as collateral and avail the loan in return. The amount of loan that can be availed depends on the Fixed Deposit amount, which can go up to 90- 95% of the deposit amount. You can apply for a loan against your Fixed Deposit in case your credit score is low, and you do not satisfy the income eligibility guidelines, or when you don’t have an alternative asset to pledge for a secured loan. The interest rate on these loans ranges between 1-2% above the fixed deposit rate. These loans are generally given in the form of an overdraft or demand loan.

Personal Loan vs. Loan against Fixed Deposit

  • Documents Required:  A personal loan is unsecured, backed with no collateral, and requires submission of a few supporting documents for verification of your credibility and getting your loan application approved. Hence, while applying for a personal loan, you are supposed to submit the standard documents such as age proof, address proof, income proof, and other necessary documents. For a loan against fixed deposit, which is secured in nature backed by your fixed deposit account as collateral, banks generally don’t ask for any documents for the loan approval or verification
  • Processing Fee: A financial institution charges a processing fee for disbursing a personal loan. If you apply for a personal loan from any of the banks, it will cost a minimum fee of 0.5-2% as a processing fee for the loan. However, in case you are availing for a loan against fixed deposit, you are not supposed to pay any processing fee. Most of the financial institutions typically don’t charge a processing fee a loan against fixed deposit
  • Loan Limit: The maximum amount that can be loaned is different between standalone personal loan and loan against fixed deposit. In a personal loan, the limit depends on the applicant’s profile and repayment history, and also the income profile. You can get a higher or lower loan amount sanctioned depending upon your profile, credit score and annual income. However, for a loan against fixed deposit, the loan amount is entirely dependent on the fixed deposit amount. Here, you can avail the maximum amount for upto 90% of the FD amount. Do note that the loan amounts for fixed deposits vary across financial institutions and majorly depends upon their discretion
  • Prepayment charges against loan: Since normal/standalone personal loans come without collateral, banks generally charge a nominal prepayment fee against these loans. On the other hand, these banks typically don’t charge a prepayment fee for a loan against fixed deposit

Conclusion

At times standalone personal loans can be more convenient and work better than a loan against fixed deposit. Nevertheless, this is entirely relative as everything depends on the specific amount that you need to loan and also, your monetary constraints. If you have a corresponding fixed deposit amount that can cater to your requirements and available in your account, then a loan against fixed deposit can be a suitable option. However, when there are a different amount and tenure requirements which cannot be fulfilled with a loan against FD, a personal loan is your genie from the bottle then. Generally, if you need a small amount that you can repay in a short duration, a personal loan is the right choice.

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