Can You Apply for a Loan Against an RD (Recurring Deposit)?

Recurring Deposits (RDs) are a popular saving instrument that combines discipline with assured returns. While their primary purpose is to accumulate savings, many banks offer the option to take a loan or overdraft against an RD. This feature allows you to meet urgent financial needs without prematurely closing the RD.

In this detailed blog, we’ll explore the intricacies of applying for a loan against an RD, its benefits, eligibility, process, and important considerations.

What is a Loan Against an RD?

A loan against an RD allows you to borrow money by pledging your RD account as collateral. This is a secured loan, where the RD acts as a guarantee for the repayment. Instead of breaking your RD and losing the interest benefits, this facility enables you to access funds while keeping your savings intact.

How Does It Work?

• Loan Amount: Banks typically allow you to borrow up to 80-90% of the balance in your RD account.

• Interest Rate: The loan interest rate is slightly higher (1-2%) than the RD interest rate.

• Tenure: The loan tenure usually aligns with the remaining maturity period of your RD.

• Repayment: The repayment can be done in installments or as a lump sum before the RD matures.

Eligibility Criteria

1. Active RD Account: You must have an active RD account with the bank offering the loan facility.

2. Minimum Deposit Duration: The RD account must have completed a certain duration (e.g., 6 months) before you can apply for a loan.

3. No Defaults: Regular and timely deposits into the RD account are mandatory for loan eligibility.

4. Account Type: Loans are usually available for individual RDs. Joint accounts may require consent from all account holders.

Features of Loans Against RD

Feature	Details
Collateral	The RD balance serves as the security for the loan.
Loan Limit	Up to 80-90% of the RD balance, depending on the bank.
Interest Rate	1-2% higher than the RD interest rate.
Tenure	Matches the remaining maturity of the RD.
Quick Processing	Loans are processed quickly since the RD acts as collateral.
No Credit Impact	Does not require a high credit score as the loan is secured by the RD.

Benefits of Taking a Loan Against an RD

1. Avoid Premature Withdrawal:

   • Breaking an RD prematurely results in penalties and loss of interest. A loan ensures the RD remains intact.

2. Low Interest Rates:

   • Compared to personal loans or credit cards, loans against RDs have significantly lower interest rates.

3. Flexible Repayment:

   • Borrowers can choose between paying in EMIs or repaying the full amount upon maturity of the RD.

4. Quick and Easy Processing:

   • As the RD serves as collateral, the loan approval process is faster and involves minimal paperwork.

5. No Credit History Required:

   • Unlike unsecured loans, you don’t need a high credit score since the RD secures the loan.

6. Continuous Interest Accrual:

   • The RD continues to earn interest throughout the loan tenure, maximizing your savings.

Step-by-Step Process to Apply for a Loan Against RD

1. Check Eligibility:

   • Confirm with your bank if your RD account qualifies for a loan. Ensure it meets the minimum tenure and deposit requirements.

2. Contact the Bank:

   • Visit your bank branch or access their online banking platform to initiate the loan application.

3. Submit Necessary Documents:

   • Required documents typically include:

     • RD account details.

     • Identity proof (e.g., Aadhaar, PAN).

     • Loan application form.

4. Loan Approval:

   • The bank will evaluate your RD account and determine the eligible loan amount.

5. Disbursement:

   • Upon approval, the loan amount is credited to your bank account. The RD remains intact and continues to earn interest.

Limitations of Loans Against RD

1. Restricted Loan Amount:

   • The loan amount is limited to 80-90% of the RD balance, which may not be sufficient for large financial needs.

2. Linked to RD Tenure:

   • The loan tenure cannot exceed the RD maturity period, which may limit repayment flexibility.

3. Interest Expense:

   • Although lower than unsecured loans, the additional interest reduces the overall returns from the RD.

4. Bank-Specific Policies:

   • Not all banks offer this facility, and terms may vary across institutions.

Loan Against RD: Bank-Specific Features

Bank	Loan Percentage	Interest Rate	Processing
SBI	Up to 90% of RD	1% above the RD interest rate	Quick processing
HDFC Bank	Up to 90% of RD	1-2% above the RD rate	Fully online option
ICICI Bank	Up to 90% of RD	2% above RD rate	Minimal paperwork
Post Office	Not available	Not applicable	Not applicable

Who Should Opt for a Loan Against RD?

• Short-Term Borrowers: Ideal for individuals with short-term financial needs who can repay within the RD tenure.

• Risk-Averse Borrowers: Perfect for those seeking a low-interest loan without liquidating investments.

• No Credit Score Borrowers: Useful for those with no credit history or a low credit score.

Alternative Options

If a loan against an RD doesn’t meet your requirements, you may consider:

1. Personal Loans:

   • Higher loan amounts but at higher interest rates.

2. Loan Against Fixed Deposits:

   • Similar to RD loans but typically offer higher loan amounts due to larger balances.

Conclusion

Taking a loan against an RD is a smart financial choice if you need funds urgently without disrupting your savings. With lower interest rates, quick processing, and flexible repayment options, it is a cost-effective alternative to breaking your RD or opting for unsecured loans. However, ensure the loan aligns with your financial needs and repayment capacity before applying.

Always check the specific terms and conditions with your bank to make the most of this facility. This way, you can safeguard your savings while addressing immediate financial needs.