Personal loan or loan against FD – Know Which Is Better
Today, a personal loan is one of the most preferred tools for financing any big or small expense. It comes with many attractive features that have made it one of the most popular debt instruments. You can avail a quick personal loan in a few minutes with a loan app. However, before applying for an instant loan you must know which loan best suits your borrowing profile.
The most common options that you have while applying for a personal loan are – an instant loan or a loan against FD. Both have their pros and cons that you must know in detail to make the right financial decision.
Read on to know more about the right choice – personal loan or loan against FD.
What is a Personal Loan?
A personal loan is a type of loan that allows the borrower to use it for a variety of expenses. For example, you can use a personal loan to pay for medical expenses, home renovation, debt consolidation, vacation, or hosting a dream wedding. This loan is available with little documentation and without the need for security or collateral. A personal loan has a flexible tenure, which means that you can pay back the loan amount at your convenience. Typically, this duration can range from 12 months to 60 months.
What Is a Loan Against FD?
A loan against FD is a form of secured loan in which consumers put their fixed deposit as collateral in exchange for a loan. The loan against FD is given to the borrower all at once, just like any other loan, and is paid back by the borrower in equal monthly instalments. Depending on the lender, your loan amount may be up to 70% to 90% of your investment. The terms and circumstances, such as the interest rate and payback period, vary depending on the lender.
What Is the Difference Between a Personal Loan and a Loan Against FD?
Here is a comparison of the two in case you’re not sure whether a personal loan or a loan against FD is the best choice.
- Maximum loan Amount
The size of the loan for personal loans and fixed deposits is varied. In a loan against FD, you can avail of up to 90% of the loan against your fixed deposit. The loan amount for a loan against a fixed deposit, however, varies from bank to bank and mostly depends on the bank’s judgment.
However, the loan limit for personal loans is determined by the borrower’s profile and capacity for repayment. In accordance with your profile and monthly pay, you may be eligible for a greater or lesser loan amount. However, with a fixed deposit, the loan amount is based on the deposit amount.
- The Interest Rate on the Loan
The interest rate on a personal loan is significantly greater than the interest rate on a loan secured by a fixed deposit. In most banks, the interest rate on fixed deposits is quite uniform. In contrast, the interest rate on a personal loan can be quite high, which is far too expensive compared to the interest rate on a loan against a fixed deposit.
- Loan Term
The max loan term for a loan against a fixed deposit must not exceed the fixed deposit’s maturity period. You can obtain a loan for a maximum of 15 years if your fixed deposit is for 15 years.
However, the maximum borrowing term for personal loans depends on your lender. If you are taking out a personal loan, you cannot take out a loan for more than the tenure offered by the lender which can range from 6 to 24 months. As a result, the fixed deposit’s term gives you more temporal flexibility than the personal loan’s tenure.
- Paperwork Needed for Loan Approval or Verification
Typically, banks don’t need any documents when you apply for a loan against a fixed deposit. However, in order for the lender to process your loan application for a personal loan, you must present a few standard papers. This paperwork includes evidence of age, proof of address, proof of income, and other essential documents when applying for a personal loan.
- Handling/Processing Fee
To release a personal loan, the bank charges a processing fee. Any bank where you obtain a personal loan will impose a processing fee on the loan. However, you are not required to pay a processing charge if you are taking out a loan against a fixed deposit. You won’t be charged a processing fee when you apply for a loan against a set deposit from the majority of institutions.
- Prepayment Charges for Loans
For loans secured by fixed deposits, the majority of banks don’t impose any prepayment fees. However, there is a possibility that the bank would impose a pre-payment fee if you apply for a personal loan.
What Is Better a Loan Against FD or a Personal Loan?
A loan against a fixed deposit can occasionally be more advantageous than a personal loan, but it all relies on the amount you need and the financial difficulties you are facing. A loan against a fixed deposit may be a good choice if you have the equivalent FD amount accessible in your account. However, a personal loan comes in handy in case you need a larger sum. Most of the time, taking out a personal loan makes sense if your loan against FD fails to meet your requirements.
Whether you should choose an instant loan or a personal loan against FD, depends on your requirements. If your required loan is 90% of your FD amount then you can go for a loan against your FD. But if you need a higher loan amount then apply for an instant loan.
Availing a loan against FD has many benefits, like lower interest rates, reduced paperwork and easy approval. You can apply for this loan despite a low credit score or low income. However, the only thing that you need to check is whether the loan amount suffices your needs.