Considering the current economic scenario when the government is taking all initiatives to bring liquidity into the system, housing finance companies (HFC) and non-banking financial companies (NBFCs) have also reintroduced liquidity feature in their fixed deposit (FD) schemes.
Companies offer pre-mature withdrawal option in company FDs. However, there is no partial withdrawal in these. In case of pre-mature withdrawal, the complete FD gets cancelled and penalty interest is charged for the period FD was held.
Let us suppose, a person has Rs 10 lakh FD for five years starting from 2017 and maturing in 2022. If he wants to pre-maturely close the FD in 2020, then he has to give up 1-2% per annum for last three years as penalty charges. There is also a possibility that he may just need 50% of the principal amount but he has to withdraw the complete amount.
Loan against FDs
All NBFC and HFCs accepting fixed deposits from public are now offering loan against deposits with certain terms and conditions. Any depositor who has invested in company FDs can apply for loan against deposits after three months of placing the deposit, by paying 2% above the FD rate for the period of loan availed.
Depositors have option to avail loan maximum up to 75% of the original principal amount of the FD, as per his requirement. Also for repayment, depositor can either pay back in one go or make part payments whenever they want, before the maturity of the deposit. If loan is not repaid, then the loan amount and interest will be adjusted from the outstanding fixed deposit amount at the time of maturity.
The loan against deposit gets processed in 4-6 working days Also, there is minimum documentation required for which the depositor can either contact the principal company directly or approach the registered brokers appointed by the companies. The depositor will need documents such as duly signed original FD receipt, two-pager loan application form of the principal company and demand promissory note with revenue stamp.
Loan against deposits brings a few benefits in comparison to pre-mature withdrawal since it gives depositor an option to get cash inflow as per his/her requirement. On availability of funds, the depositor has option to repay the loan to the principal company along with interest and the FD will continue as original investment till maturity.
The impact of the interest on loan on actual investment is comparatively low in comparison to the pre-closure charges and opportunity loss in case of pre-mature withdrawals.