Here is all you need to know to get a Loan against Life Insurance Policy/Fixed Deposits/PPF/NSC:
Mr. Balaji had immediate fund requirement to support his daughter’s education. He had some Fixed Deposits with his bank. He was wondering whether he has to break the FDs to arrange funds or whether he can avail any overdraft or loan facility against his FDs. So, he approached his bank, and he was informed about the loan facility available on FDs. On further enquiry with his banker, he also came to know that he can keep his NSCs and Life insurance policies which he has with the bank, as collateral to make fund arrangements.
In the post below, I will take you through the details on the loan facility available against Life Insurance Policies/Fixed Deposits/PPF/NSC.
Loan against Life Insurance Policy
The primary objective behind buying a life insurance policy is to provide financial security to your family against any unforeseen and unfortunate event happening with you. But, these days life insurance policies have become more versatile and provide some other benefits along with meeting its primary purpose. You can avail a loan against your life insurance policies in case of an emergency fund requirement from your insurer, banks or NBFCs. However, not all insurance policies come with the loan facility. Some of the conditions for loan against life insurance policies are listed below:
• The policy value does not change if you take a loan against a life insurance policy.
• You can only avail a loan if you have paid the annual premium on time for at least three years. It implies that you cannot avail loan before the completion of 3 years from the date you bought the policy.
• The loan is granted as a percentage of the surrender value of the policy and varies from one financial institution to another. Life insurance companies offer loan up to 90% of the surrender value, on the other hand, banks consider a higher margin of 15-20% of the surrender value.
• Many of the banks do not provide loan against ULIPs and term plans.
• Banks offer the loan facility in the form of overdraft facility, term or demand loan.
• Banks charge a processing fee on loan along with the interest rate. The rate of interest is linked to the base rate.
• When you avail a loan from life insurance companies, the principal gets deducted from the final value of the policy and the interest has to be paid during the tenure of the loan. In case of banks, you have to repay the loan during the tenure of the loan in the form of EMIs.
• Loan against a life insurance policy is usually cheaper compared to loan against FDs, personal loans and loan against shares and debentures.
Note: There is a major shortfall with this option. If the borrower passes away during the policy tenure, the outstanding loan amount and the interest will be first deducted before paying the policy benefit to the beneficiary. As a result, the beneficiary will not receive the entire benefit of the policy.
Loan against Fixed Deposits (FDs)
Fixed deposits are considered to be one of the safer investment tools in India as they offer a fixed rate of return at the end of their tenure. You may come up with the situation where you require an immediate liquidity. Hence, your banks also give you the option to avail loan facility against your fixed deposits without having a need to break your FDs. Some of the eminent features of this service are listed below:
• Loan against FDs is available up to the remaining tenure of the FD on a renewal basis.
• The loan is provided in the form of overdraft against the deposits.
• To avail a loan against your Fixed deposits; you have to fill up the loan application form and attach the fixed deposits receipts along with the form.
• Minimum loan amount is Rs. 25,000 and the maximum loan amount differs from one bank to another. For instance, banks such as SBI, ICICI and HDFC Bank provide loan up to 90% of the FD value. On the other hand, Axis Bank offers loan facility of up to 85% of the FD value.
• The interest charged on loan will be one or two percent higher than the applicable rate on the FD.
• Interest is charged on the loan amount which has been utilised and till the time loan is utilised.
• For instance, you have an FD of Rs. 1 lakh with your bank and loan amount approved by the bank on the FD is Rs. 85,000. Suppose, you decided to utilise Rs. 40,000 of the approved amount on 15th of the month and paid back the entire amount on 30 th of the same month, then you will have to pay interest only on Rs. 40,000 for 16 days i.e. from 15th to 30th of the month.
• The banks do not charge a processing fee on such loans. Also, no penalty is charged by most of the banks for prepayment of the loans.
• The depositor can do the repayment of the loan in a lump sum or EMIs.
• In case of failure of loan repayment, banks have the authority to foreclose the FD to recover the loan amount.
• You cannot avail loan against an FD opened in the name of a minor. Also, loans will only be provided on the deposits free from restraint and lien.
• In case of an FD which was opened jointly, all the holders of the deposit have to sign the loan documents and the onus of paying back the loan lies on all holders of the fixed deposit.
• The depositor will continue to receive the interest on the underlying deposit.
Loan against Public Provident Fund (PPF)
You can also avail a loan facility against your PPF account. Some of the features of this facility are listed below:
• Loan against PPF is available between the 3rd and the 6th financial year i.e. from the start of the 3rd financial year up to the end of the 5th financial year from the account opening date.
• Suppose, you have opened the PPF account in the year 2015, then starting from April 01, 2017, you can avail a loan against your PPF account till March 31, 2021.
• Maximum loan amount is capped at 25% of the balance at the end of the 2nd year coming before the year in which the loan is availed. So, considering the above example, you will be eligible for the loan amount of up to 25% of the balance in your PPF account on March 31, 2016.
• The tenure of the loan is three years.
• Interest charged on the loan amount is 2% higher than the effective rate on the PPF account.
Loan against National Savings Certificates (NSCs)
If you are holding NSC with banks, you can avail loan by keeping them as collateral in case of an emergency fund requirement. Listed below are the features of such facility:
• You can avail a loan for personal as well as business purpose such as for meeting medical expenses, education, business enhancement, etc.
• The minimum and maximum age limit to avail loan against NSC are 18 and 75 years respectively.
• The certificate has to be in the name of the person applying for the loan. The loan will not be granted if the certificate is in someone else’s name.
• Loan amount varies between 85-90% of the certificate value and depends on the tenure of the certificate.
• The loan tenure is equal to the certificate tenure.
• The loan can be repaid in advance or can also be paid in EMIs during the tenure of the loan.
• The interest charge on the loan amount varies from one bank to another and ranges between 4-7% above the base rate.
The primary objective behind investing in the above schemes is to inculcate saving habits, secure your future and to meet your long-term objectives. Availing a loan against these schemes beats the primary purpose of investing in them. It is crucial that your investments are aligned to your goals. You should plan your finances such that you have sufficient cover for any unforeseen events so that you do not have to go through any financial challenges.