Personal Loan vs Loan Against FD: Which may be a cheaper option on Rs 5 lakh loan for 5 years

What do you do when you need money to fulfil an urgent or long-term requirement? People take money from some known person. But the problem crops up when you need a large amount and any of your acquaintances don't have sufficient money to fulfil your requirements. Then you move to a lender to take the personal loan. 
Personal loans come at a steep interest rate compared to home loans or gold loans since there is no collateral involved. A personal loan from a private or public bank can be anywhere between 12 and 25 per cent. The loan with such a high interest rate certainly fulfils your requirement, but you end up paying a high interest rate along with your principal. 
But there is another way to get a loan at a cheaper interest rate. That loan is known as a loan against FD. 

What is a loan against FD?

A loan against FD is a loan one can take against the amount they have deposited in a FD scheme.

To put it in simple words, your FD amount works as collateral for the loan.

For example, if you have invested Rs 5 lakh in an FD, you may get up to 90 per cent to 95 per cent of your deposited amount as a loan. 

Since your FD amount works as collateral, a loan against FD can be significantly cheaper than a personal loan.

At the same time, one also gets rid of the hassles of the processing fee while taking a loan against FD. 

What will be the interest rate of loan against FD

The interest charged on loans taken against FD is usually 1% to 2% more than the interest rate on FD.

Suppose you have invested Rs 5 lakh in the SBI 5-year FD and are getting an interest rate of 6.50 per cent, then you may get a loan against FD at 7.50 per cent to 8.50 per cent. It may also be more than that. 

What is the tenure to repay the loan?

One can return the loan against FD before the maturity period of their FD. E.g., if you have taken a Rs 5 lakh loan 1 year into your Rs 5 lakh FD, you will still have 4 years to repay the loan.

But if you are not able to repay the loan on time, the loan is covered by the amount of your FD.

Also, you can repay this loan in a lump sum or instalments as per your convenience.

Personal Loan vs Loan Against FD: Which is cheaper?

Here, we take the example of State Bank of India's personal loan rates versus its FD rates for the 5-year FD. 

SBI offers personal loans in the range of 11.15%–15.30%. It means for a Rs 5 lakh, 5-year loan, your EMI will be Rs 10,909-Rs 11,974 (As per Paisabazaar.com). 

The bank charges 1.50 per cent (from a minimum of Rs 1,000 to a maximum of Rs 15,000).

Now, we take the example of 5-year SBI FD rates of 6.50 per cent. Here, we assume that one will get a personal loan at a 2 per cent higher rate, i.e., 8 per cent.

For a Rs 5 lakh, 5-year-loan, the EMI will be Rs 10,258.