When it comes to buying a new car, many individuals opt for vehicle loans to finance the purchase. While this is a great way to pay for a new vehicle, some borrowers may not qualify for a standard car loan. More importantly, some borrowers may be interested in alternatives to a car loan for various reasons. If you have a fixed deposit (FD), you can book your dream car with ease.
You can simply use your FD as collateral and get a loan against it. Read this guide and you’ll find out how you can use your FD to purchase a car.
How Does a Loan Against FD Work?
When you apply for a loan against your fixed deposit to purchase a car, the lender or bank treats it as a demand loan or an overdraft against your deposit. This means your FD now becomes collateral. You can repay the loan amount and the applicable interest via flexible EMI repayment plans.
In case you’re unable to pay back the loan, the bank will use funds from your FD account and adjust payments accordingly.
Why Use FD as Collateral
Using your FD account to purchase a car over a typical car loan has many benefits:
- The primary advantage is the interest rate of the loan, which will be much lower than a car loan. Normally, the interest rate charged on a car loan will be 2 to 3% higher than that of a loan against FD.
- You are free to choose the loan tenure, but it should not exceed the maturity period of your FD.
- You will not be charged any processing fees for a loan against FD. This is because you already are a customer with the bank.
- Using your FD to purchase a car is a smart way of meeting short-term needs without having to prematurely break any investments.
- Since banks offer competitive interest rates on loans against FDs, you can afford monthly EMIs without financial issues.
Important Points to Remember before Taking a Loan Against Your FD
Before you apply for a loan against your FD account, remember the following important points –
- If yours is a joint FD account, your co-account-holder will also need to sign the loan documents. So, make sure you discuss your decision with them.
- If you fail to repay the loan, your bank has the authority to close your FD account in a bid to recover the debt amount.
- Do not opt for a loan tenure that exceeds the tenure of your FD.
- Your underlying deposit amount will continue to earn interest.
- You will not be able to close or break the FD once you have applied for the loan.
Made your decision? Then, take the first step right where you are! Make sure you understand the associated terms and conditions before booking a car with your FD.