What Role Does Credit Score Play in Approving Loans on Fixed Deposits?

Fixed deposit (FD) loans have always been a popular source of funding for those who do not want to put their investments at risk. This type of loan is great for anyone who wants to take a loan against the amount they have invested in FDs, which are considered to be the safest investment options. However, before you apply for a loan on fixed deposit, it’s essential that you have a good credit score. But how does credit score play a role in approving loans on fixed deposits? Let’s find out.

Credit Score 101

A credit score is a three-digit number that is assigned to an individual based on their creditworthiness. It is calculated based on their credit history, which is a record of their past borrowing and repayment behavior. You can think of your credit score as an indicator of how likely you are to repay your debts on time.

The credit score generally ranges from 300 to 900. Scores above 750 are considered excellent and indicate good creditworthiness, whereas scores below 500 are poor and indicate a high risk of default.

The Role of Credit Score in Loan Approval

In general, the credit score is one of the most important factors that lenders consider when evaluating loan applications. A higher credit score indicates a lower risk of default, and lenders are more likely to approve loans to individuals with good credit scores.

For loans on fixed deposits, the credit score plays a crucial role as well. When you apply for a loan against fixed deposit, the lender will evaluate your creditworthiness based on your credit score. If you have a good credit score, they are more likely to approve the loan and offer favorable terms, such as a lower interest rate.

However, if you have a poor credit score, the lender may require additional collateral or may charge a higher interest rate to compensate for the increased risk. In some cases, if the credit score is too low, the lender may even reject the loan application altogether.

Interest Rates for Loans on Fixed Deposits

Apart from credit scores, the interest rate for loans on fixed deposits also plays a crucial role in deciding the loan approval. In general, the interest rate for such loans tends to be lower than unsecured loans like personal loans because the lender has collateral in the form of the fixed deposit. As a result, the lender is likely to offer a lower interest rate as they have adequate security.

However, the interest rate for loans on fixed deposit can still vary depending on various factors. For example, the interest rate may depend on the amount of the loan, the repayment tenure, and the credit score of the borrower.

For individuals with a high credit score, lenders may offer lower interest rates to attract more customers. However, if you have a poor credit score, the lender may charge a higher interest rate to compensate for the increased risk.

Industry Standard Practices

When it comes to loans on fixed deposits, industry standard practices dictate that lenders must evaluate the creditworthiness of the borrower, including their credit score, before approving the loan. This is to ensure that the lender has adequate security and to minimize the risk of default.

In general, most lenders tend to offer loans up to 75-80% of the fixed deposit amount. As a result, if you have a fixed deposit of Rs. 1 lakh, you can expect to get a loan of around Rs. 75,000 to Rs. 80,000.

Additionally, the repayment tenure for such loans tends to be shorter compared to unsecured loans like personal loans. In general, the repayment tenure for loans on fixed deposits ranges between six months to three years.

Conclusion

In conclusion, a good credit score is essential when it comes to approving loans on fixed deposits. Lenders evaluate the creditworthiness of the borrower based on their credit score, which indicates the likelihood of repayment. If you have a good credit score, you are more likely to get a loan on favorable terms, including lower interest rates. However, if you have a poor credit score, the lender may charge a higher interest rate or reject the loan application altogether. As such, it is always recommended to maintain a good credit score to increase the likelihood of loan approval, including loans on fixed deposits.