When a person is in need of short-term emergency funds, loan against fixed deposit (FD) can work out to be a good option
Interest rates are lower than on personal loan and loan against gold
There is no processing fee, paperwork is minimal, it's sanctioned quickly, and repayment tenure is flexible. The borrower needs to repay it before the FD matures.
Your FD continues earning interest, while the loan comes at a rate that is 100-200 basis points above your FD rate. That means the effective rate of interest is just 1-2% on the loan
At the cost of 1-2%, it makes more sense to take a loan against FD instead of liquidating it. To liquidate an FD, most lenders will charge you a premature withdrawal penalty
If a credit bureau doesn't have your profile because you never had a credit card or have never taken a loan, loan against FD can help build your credit profile
But taking a loan against FD cannot help much to improve your credit score. “Credit bureaus assign a lower weight to loan against FD as it doesn't require credit profile evaluation,” says Arun Ramamurthy, director, Credit Sudhaar