Securing a Loan against one's Fixed Deposit? @ 1% more than the Bank Interest

#1
Securing a Loan against one's Fixed Deposit? @ 1% more than the Bank Interest?

Dear Forum,

I am in a situation right now where I want to invest in the Stock Market in a few scripts however do not have spare cash and most of my money is blocked in Fixed Deposits..

Now, I know taking a personal loan is not a worthy decision however taking a loan against one's own FD is it viable as the bank Canvasses that to be more economical for me as I would just be paying 1 % more than the given interest rate..

Can someone please throw some light on the same?
I want to do a comparison between a FD where i get a fixed amount over and above the principal amount as Interest to the payment of the loan as the Bank mentions that i will be paying just 1% more but I could not get any mathematical details.

One more thing, I would also be getting only to use 85% of my FD amount.. and the best part is that i can choose to pay it any time before or on during the maturity.
 

AW10

Well-Known Member
#2
Now, I know taking a personal loan is not a worthy decision however taking a loan against one's own FD is it viable as the bank Canvasses that to be more economical for me as I would just be paying 1 % more than the given interest rate..


Big BS from bank's sales person. Bottom line is bank is paying u 4% on FD (assuming that is the interest that u are getting on yr FD) and they want u to take loan from them and pay them 5%.. And when FD matures, they will refund 4% of the 5% that u are paying to them. Net net - they have earned 1% from u. -
For eg. - On yr FD of 10k, u make 400 Rs at 4%. You take loan from them and pay 500 as interest. So when FD matures, they will give u back 400 from the 500 that u collected from u and pocket 100 rs .

Bottomline, Bank's earn from loan interest, They want u to take loan, and They employe some of the best brains to come out with sales strategies to fool u with and still leave you with the feeling that u have made smartest financial decision.

Dear, that's how bank make money. If u need money, then what is holding u back from breaking those FD and using your own money directly. What u will loose is 4% return on FD which is better then paying 5% to them. You are still saving 1%.

I would certainly reject this idea. Don't know what others think
 

anuragmunjal

Well-Known Member
#3
hi..
there are 2 ways of going about it
1. if u require cash for short durations, take an OD limit against ur fd. the advantage is instant liquidity, even though u wd b paying 1-2% above what u r getting in ur fd. assuming u have a fd of 10 lacs and u require 5 lacs for 10 days, u can get the amount istantly, u pay back 5 lacs in 10 days' time, ur fd remains intact and u pay the extra interest only for 10 days.
2. if u plan 2 invest fr a longer term, u wd b better off breaking ur fd as aw10 suggested,
no point paying interest 2 the bank on ur own money.

regards
Anurag
 
#4
Dear AW10 and Anurag,
I ahve presented an actual example for you to help me in making a decision as there's also a school of thought as not borrow and invest in the Stock Market so its a little difficult decision for me..though looks simple when its merely 1%..So please advise

AW10 said:
For eg. - FD of 10k, u make 400 Rs at 4%. You take loan from them and pay 500 as interest. So when FD matures, they will give u back 400 from the 500 that u collected from u and pocket 100 rs .

Dear, that's how bank make money. If u need money, then what is holding u back from breaking those FD and using your own money directly. What u will loose is 4% return on FD which is better then paying 5% to them. You are still saving 1%.
Of losing the Interest Rate as high as 9.5%..As if I repay I am still getting the Int Rate of 8.5% Net which is not bad..But I want to confirm whether its jsut 1%more or will be 10.5% totally?
Ex:-
FD Rs 57,000/- @ 9.5% Compound Int
Opening Date : 18-5-2009
Closing Date : 18-5-2011
Maturity Amt : Rs 68,776/-

I have a 2 FDs of Rs 57,000/- each i.e. total Rs 1,14,000/-
The current value on breaking the FD of Rs 57,000/- last week was Rs 59,318/- and the actual maturity value is Rs 68,776/- for a period of 24months @ 9.5%.

Then as per the bank if I get a OD facility against the 2 FD 's then it will be Rs 1,14,000 85% -> Rs 96,900/-

Then can u give me the calculation details if I can repay the amount by 1-Sep-2010 if im breaking the FD on 6-Feb-2010.. Like how much will I have to pay totally to the bank as far as I know the sooner I pay the better for me !



hi..
there are 2 ways of going about it
1. if u require cash for short durations, take an OD limit against ur fd. the advantage is instant liquidity, even though u wd b paying 1-2% above what u r getting in ur fd. assuming u have a fd of 10 lacs and u require 5 lacs for 10 days, u can get the amount istantly, u pay back 5 lacs in 10 days' time, ur fd remains intact and u pay the extra interest only for 10 days.

Anurag
I am not exactly sure of the time frames however I will be able to repay at the earliest i.e in 7-8 months..
So will it be a good deal then?


2. if u plan 2 invest fr a longer term, u wd b better off breaking ur fd as aw10 suggested,
no point paying interest 2 the bank on ur own money.

regards
Anurag
I will be getting some money in the next 7-8 months so it will be a good idea not to break the FD then...

Please feel free to show any other hidden costs on the bank front that I need to be aware of..
 

AW10

Well-Known Member
#5
Think logically man it is not that difficult.. I am trying to give my approach of analysis. hope this gives u some idea about how make such financial decision.


Code:
Choice	        Amount	Rate	Amt after gain	Net gain
                                  2 yrs
Continue FD	114000	9.50%	136689		22689
					
Continue FD	114000	9.50%	136689	22689	
+ take loan	97000	10.50%	118439	21439	
			net return		1249
					
Break FD	118256	12%	148340	30084	
+ interest already earned so far	4256	
					            34340
You can clearly see, that if option 1 and 2, how much u will be loosing in 2 yrs.

In 3rd option I have assumed Rate of return of 12% that u might be able to generate from next source wherever u want to put money next.
but if u don't have track record of successfully generating money from trading, then i will not suggest to bet on that. Specially in initial years it is difficult to make money in trading.

If you are still confused then take intermediate route i.e. let one FD run, break 1 FD and start trading with that. If you find that your trading is giving u better return, then after few months, u can always break second FD and bring in more funds.

Keeping this topic aside.. don't forget your higher level financial plan and your financial security. At any stage, it is suggested that u shd have atleast 6 months of living expense in bank (I would say 12 months cause when we have to face such a worse situation of no income and living on saving, then we get into -ive psychologocial state and nothings seems to work at that time). Returns from trading are not guranteed until u have learnt trading and yr track records shows that.

All the best on your journey to financial maturity.
 
#6
Dear Aw10,
I am interested in your second example but need a little help.As far as my understanding goes I will be paying only 1% difference..Or is it just to con customersby saying that?when I would be actually paying 10.5% to the bank..




Please find the below example 2 :
Loan Amt Int Rate Maturity Amount
Rs 97,000 @ 9.5% Rs 1,17,037
Rs 97,000 @ 10.5% Rs 1,19,343
----------------------------Rs 2306

Now can you please explain why the Net Gain is Rs 1249 in your example..

I am going to repay the money before maturity in the month of August of this year though the FD will mature in the May of next year..So If Im repaying then how much would I be paying ti use this money for that much time..

I would appreciate if you could help me with a formula in Excel so that i know how much I will pay depending on the date...
 
Last edited:

AW10

Well-Known Member
#8
Dear Aw10,
Now can you please explain why the Net Gain is Rs 1249 in your example..

I am going to repay the money before maturity in the month of August of this year though the FD will mature in the May of next year..So If Im repaying then how much would I be paying ti use this money for that much time..

I would appreciate if you could help me with a formula in Excel so that i know how much I will pay depending on the date...
I think, my examples were as clear as I could explain. In option 2, 1249 is difference of intereste that u earn and interest that u pay. Here I have taken that u earn interest on 114k but pay interest on reduce amount of 97k.

Formula for calculating interest is very standard and it can be searched easily on google http://math.about.com/od/businessmath/ss/Interest_3.htm

Plz take a look at following calculation which I have done for just 97k of amount. Logic is simple, if u have left 97k with bank, how much will they pay you as interest. And if u take 97k of loan then how much will u pay them as interest.. and what is the net diff..

Code:
	Principal IntRate Interest 	Total

			=A3*B3	=A3+C3
Yearly	97000	9.5%	9215	106215
			=B5*C5*6/12	
for 6mth97000	9.5%	4607.5	101607.5
	97000	10.5%	5092.5	102092.5
So even in this case where u pay back loan after 6 months, u will be paying them about 600 rs. extra. Though the amount is miniscule but the awareness of reality is important.
My final thought - By this decision, Bank is going to earn from you where they don't earn anything from you now.

All the best.
 
#9
Hi,

I am incurring an Expense of appox. Rs.90,000. will loan against fixed deposit of 1 lakh would be viable option to regain this expense ? after locking them for 5-10 years ? without taken burden of re-payment ? and paying them after maturity ? Can any one please guide me the best way to invest in it ?

Thanks,
Richi
 

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