When borrowing against a fixed deposit, banks maintain the FD while placing a lien on the deposit. According to reports from The Times of India, many banks allow customers to borrow up to a certain percentage of the FD amount. For instance, public lender SBI may allow borrowing up to 90% of the FD value, though this depends on the bank's specific rules. The primary advantage of FD loans is that borrowers continue earning interest on their FD even while taking the loan against it.
The fundamental difference lies in collateral security. As reported by The Times of India, FD loans offer lower interest rates because banks already have the deposited money as collateral, reducing their risk exposure. Personal loans typically charge higher rates due to the absence of collateral security, with rates depending on the borrower's credit score, salary, and repayment history. For a ₹5 lakh loan over 24 months, an FD loan at 8% interest would result in EMI of approximately ₹22,600 with total interest of ₹42,700, while a personal loan at 12% interest would require EMI of around ₹23,500 with total interest of ₹64,900.
The financial impact of choosing between loan types becomes significant over time. According to calculations from The Times of India, borrowers would pay over ₹22,000 more in interest if they opt for a personal loan instead of an FD loan for the same amount and duration. These figures represent examples and may vary depending on individual bank terms and conditions. The substantial difference in interest rates reflects the reduced risk profile for banks when accepting deposited funds as collateral.
