There are multiple options to get personal loan in India each different from the other. The options are as follows:
- Regular personal loan
- Loan against fixed deposit
- Loan against shares or mutual fund
- Loan against LIC policy and others
And in this article, we’ll compare two most widely used options: regular personal loan and overdraft against fixed deposit (or loan against term deposit).
Type of loan (secured and unsecured):
Money kept in FD acts as a security when taking loan against it. So this is a secured type of loan. Whereas personal loan is an unsecured loan since borrower does not have to keep any type of security with the bank.
In case of conventional loan, banks follow a lengthy and time consuming process before granting the approval. This includes filling application form, verification of address, income, employment details by the banks, and few others. But in case of overdraft loan, there is no need of address verification as banks already have this detail. Moreover income or IT return proof is not mandatory in case of overdraft loan. As most of the other details are already with the bank, no re-verification is required.
FD loan is processed at a faster pace compared to regular loan which is more time consuming.
There are multiple criteria taken into consideration when loan amount is decided. But the two main criteria in case of personal loan are – income/salary and CIBIL score. But in case of overdraft loan, amount is dependent on the fixed deposit amount kept with the financial institution. So you can get high loan amount in case of personal loan but not in case of OD loan.
In case of regular personal loan, financiers ask for various documents such as income proof, bank statement, IT returns, address proof, ID proof etc. in addition to the application form. In comparison, when you take loan against term deposit, very less documents are required. This includes pledge/lien letter, deposit receipt/certificate, and few others.
Must read: Consequences of submitting fake income documents for personal loan.
Higher rate is charged by the bank when granting a regular personal loan and is typically 16% minimum to as high as 24%. But in case of personal loan against fixed deposit the rates are lower but minimum 2% higher than the interest offered on FD. So FD offering a 9% interest can offer loan at 11% which is lower than a normal loan. The reason for high interest is that, a conventional loan is an unsecured loan i.e. financial institutions do not demand pledging any security. So the risk of granting money remains high till its closure. But overdraft loan is a secured loan in which FD acts a security with the bank.
When you take term deposit loan, the interest is applied only on the balance loan amount and not on the entire FD amount kept with the bank. In case of traditional loan, interest is applied on the entire loan amount and other factors such as tenure, credit score of the borrower, etc. is taken into consideration.
No credit score check:
Whenever a loan or credit card application is made, banks contact credit bureau (CIBIL) and verify the financial history of the borrower. This process is very important and helps banks in evaluating whether the applicant is credit worthy or not, based on the credit score calculated for the applicant. But while applying for personal loan against fixed deposit, there is no credit bureau check because FD is a security kept with the bank.
Additional reading: Tips on getting personal loan when you don’t have salary slip.
Anyone aged above 18 years can apply for a loan. But only an individual with FD account on his/her name can apply for loan against FD.
Every loan application involves human efforts, this is the one of the reason banks charge processing fee. But in case of overdraft loan there is no processing fee charged by many of the banks e.g. SBI and Federal bank. But there are some banks (e.g. Axis bank) who charge a very nominal fee.
No prepayment penalty:
Higher the loan tenure, higher would be the interest earned by the bank and so would be their profitability and vice versa. There is a pre-penalty fee applied if borrower wants to make payment before the standard period and close the account early. This fee is not applied when you want to close the overdraft loan prematurely. For e.g. if the loan tenure is 3 years and borrower wants to close the loan account within 1 year then banks will be at loss because they will not be able to make money, as interest income will stop. This is not the case when taking loan against term deposit, there is no pre-closure charge applied.
Loan application timeframe:
You can apply for personal loan anytime. But against FD, you can apply only minimum 3 months after opening the fixed deposit account.
No need to specify the reason for loan:
While personal loan requires the applicant to specify the reason, the same is not asked when taking personal loan against fixed deposit. So you can use money for any purpose such as travel, buying a vehicle, house renovation etc.
If you default on loan against FD then bank has right to seize the FD account and recover money. But in case of traditionally granted personal loan, consequences are worst if default continues for a long period. Since the financial institution does not have any borrower’s asset kept as a security, they have nothing to seize. So in such situations banks employ recovery agents or in-house collection department, whose job is to recover money from the defaulting borrower by taking control of their personal assets, calling or personally visiting the house and other means, as per the law.