Personal Loan

How To Use Fixed Deposits To Get A Car Loan


Fixed deposits (FDs) are a popular way to invest money. Although mutual funds and other investment options provide higher returns, fixed deposits (FDs) remain in demand. In addition to guaranteed profits, FDs provide investors with significant liquidity.

Did you know that you can use your fixed deposit to get a car loan for a reduced interest rate? Many financial institutions in India accept fixed deposits as collateral for car loans made by non-bank financial companies (NBFCs). Most people would consider this unconventional vehicle financing approach an overdraft.

Loan Against Fixed Deposit to Buy a Car

No assets to pledge as security? You may quickly apply for a car loan against FD by using your fixed deposit as collateral. It is often known as an overdraft facility than a traditional loan. Car loan applications with a predetermined down payment are processed quickly. It is allowed for banks to lend 90% of the value of the FD for vehicle loans. It is vital that the loan may be secured without having to sacrifice your fixed deposit or interest earnings.

How to Apply for a Car Loan Using a Fixed Deposit?

An FD is an easy and practical choice for auto finance. It gets approved faster with less paperwork involved. The FD may still be utilized to get a car loan, and as a bonus, you can keep earning interest on the money invested.

Here are the steps you need to do to get a car loan using a fixed deposit as collateral:

  • Visit your preferred bank branch or NBFC. The financial institution can be the same one where your fixed deposit account was opened, or it can be different.
  • Apply for a loan to get an overdraft on your fixed deposit.
  • Hand over your fixed deposit receipts to the lender.
  • The lender will recognize the fixed deposit as collateral and credit the funds to your bank account.

Documents Required for a Car Loan Against FD

A car loan against a predetermined down payment requires little documentation. This is because you already have a bank account with the lender. Since the documentation process for the fixed deposit is already complete, the paperwork is straightforward.

The following documents must accompany your car loan application:

  • Completed application form
  • Payments you received from the lender once the fixed deposit was returned
  • Legal Agreement

Features of a Car Loan Against a Fixed Deposit

Here are some important points about taking a car loan against your fixed deposit:

  • You may get a car loan for up to 90% of your fixed deposit value. The lender determines the maximum amount that can be borrowed.
  • These loans often have interest rates ranging between 2% to 3% more than the rate you earn on your fixed deposit. For instance, if your fixed deposit yields 8%, the car loan interest rate can be between 10% and 11% annually.
  • No origination fees are associated with a car loan issued against a fixed deposit. However, there are some additional costs, such as pre-closing fees and stamp duty charges.
  • You can choose the period for repaying your loan. However, it should be, at most, the term of your fixed deposit. For example, if the length of your fixed deposit is five years, you can choose a loan repayment term between one and five years.

Benefits of Using a Car Loan Against FD

There are several positives associated with securing auto finance against a fixed deposit:

  • The interest rate is cheaper compared to conventional vehicle loans.
  • A car loan may be repaid over a period that is totally up to the borrower. It’s important to remember that the duration can be, at most, the duration of your fixed deposit.
  • The application procedure for a car loan against FD is quick and easy. It requires less documentation and may thus be approved faster.
  • You may get car loans to help you purchase a vehicle without draining your resources.
  • Your fixed deposit will continue to earn interest even if you take a loan against it.

Auto Loans vs Fixed-rate Deposit Rates for Interest

When you apply for a car loan using a fixed deposit as collateral, the bank treats it the same as a demand loan or overdraft. Such loans often have an interest rate of just 2-3% more than the interest earned on the FD. The interest rate is much lower than those charged on an ordinary car loan. On average, a car loan interest rate ranges from 9% to 12% per annum, or even higher.

Funding for a Term Deposit

Most Indian banks will lend you somewhere from 70% to 90% of the fixed deposit amount. However, this varies between lenders. The likelihood of getting a car loan from a financial institution increases if you have a strong credit history and credit score.

The Structure of a Loan and Repayment Terms

Loan terms always match the duration of the corresponding fixed-rate investment. The car loan term may be lower than the fixed deposit maturity, but it can only be for a while. If you had a term deposit with a five-year term, you can get a loan with a period of anything from one to five years. However, the tenure must be at most five years.

The Bottom Line

A fixed deposit benefits you in many ways. It’s a safe method to put money to work, with guaranteed returns and tax benefits. You can also use your fixed deposit as collateral for a loan, such as a car loan. To learn more about using fixed deposits to get a loan, you can read related blogs on the Piramal Finance website.