A loan against fixed deposit is often seen as one of the simplest borrowing options available. Since it is backed by your own deposit, it usually comes with quick approval and fewer formalities. Still, many people hesitate because they do not fully understand how the loan against fixed deposit interest rate works.

There are several myths around this facility. Some borrowers assume it is costly, others believe it affects their deposit returns, and many are unsure if it is truly better than a personal loan. In reality, most of these assumptions are inaccurate.

This article breaks down the most common misconceptions and explains the facts clearly, so you can make an informed decision when considering a loan against fixed deposit.

Myth 1: A loan against fixed deposit has very high interest rates

One of the most widespread beliefs is that the loan against fixed deposit interest rate is extremely expensive. Many people assume banks charge much more simply because the facility is quick.

In reality, this type of loan is usually cheaper than unsecured borrowing. Since the lender already holds your fixed deposit as security, the risk is low. Because of this, banks typically charge an interest rate only slightly higher than the FD rate.

For example, if your deposit earns 7 percent annually, the loan rate may be around 8 to 9 percent. This is often lower than personal loan rates, which can go well above 12 percent.

So, the myth that it is a costly borrowing option does not hold true in most cases.

Myth 2: Your fixed deposit stops earning interest once you take a loan

Another common misunderstanding is that once you take a loan against fixed deposit, your FD interest stops completely. People worry they will lose the returns they were expecting.

The truth is that your deposit continues to earn interest as per the original terms. The fixed deposit remains active and does not get cancelled. You still receive the maturity value, including accumulated interest.

However, you will be paying interest on the loan separately. The loan cost and FD earnings run side by side.

This is why many borrowers use this facility for short-term liquidity needs without disturbing their long-term savings.

Myth 3: The interest rate is the same across all banks

Some borrowers believe that the loan against fixed deposit interest rate is standard everywhere. They assume all banks follow the same pricing.

In reality, rates can vary depending on:

• The bank or financial institution
  
• The FD interest rate applicable to your deposit
  
• The loan amount and tenure
  
• Whether the FD is held with the same bank

Most banks offer loans at a rate that is one to two percent above the deposit rate, but the exact margin differs.

It is always useful to compare terms before applying, especially if you have deposits with different institutions.

Myth 4: Loan against fixed deposit is only useful in emergencies

Many people think that a loan against fixed deposit should only be taken in extreme emergencies, such as medical situations.

While it can certainly help during urgent needs, it is also useful in other scenarios, such as:

• Meeting short-term business cash flow gaps
  
• Avoiding premature FD withdrawal
  
• Paying for planned expenses temporarily
  
• Managing education or travel costs without breaking savings

Because it is a secured loan with relatively low interest, it can be a smarter alternative to disturbing your investment.

So, it is not only for emergencies. It can also be part of sound financial planning.

Myth 5: Taking this loan affects your credit score negatively

Some borrowers believe that applying for a loan against fixed deposit will harm their credit score automatically.

A loan itself does not reduce your score. What matters is repayment behaviour. If you repay on time, it may even support your credit history positively.

However, delayed payments or defaults can affect your credit score, just as with any other borrowing facility.

Since the loan is secured, lenders may recover the amount by adjusting against the deposit, but missed repayments can still be reported.

So, the impact depends on how responsibly the loan is managed.

Myth 6: You can borrow the full FD amount

A very common assumption is that you can take a loan equal to the entire deposit value.

In practice, banks generally allow borrowing up to 75 to 90 percent of the FD amount. The exact percentage depends on the lender’s policy.

This margin exists to ensure the loan remains covered even if interest accrues or penalties apply.

So, if you have an FD of Rs. 5 lakh, you may be eligible for a loan of Rs. 3.75 lakh to Rs. 4.5 lakh, not the full amount.

Understanding this helps avoid unrealistic expectations.

Myth 7: Premature closure is the only option if you cannot repay

Some people fear that if they cannot repay the loan, they will lose the FD completely.

While the deposit can be adjusted against the outstanding amount, repayment flexibility often exists. Many banks offer:

• Interest-only payments for a period
  
• Repayment in instalments
  
• Adjustment at maturity

In many cases, borrowers choose to repay the loan before FD maturity, but even if repayment becomes difficult, it does not always result in immediate closure.

Still, borrowers should always understand the terms clearly before borrowing.

Myth 8: Loan against fixed deposit interest rate is fixed forever

Another myth is that once you take the loan, the interest rate remains fixed no matter what.

In most cases, the loan rate is linked to the deposit rate plus an additional margin. If the deposit terms change or if the bank revises its lending structure, rates may differ for new loans.

For existing loans, the rate is generally agreed at sanction, but it is important to confirm whether the facility is fixed-rate or floating-rate depending on lender policies.

Borrowers should always check the applicable structure in advance.

Myth 9: It is better to break the FD instead of borrowing

Many people assume withdrawing the FD early is simpler than taking a loan.

However, premature withdrawal usually results in:

• Loss of higher interest benefits
  
• Penalty charges
  
• Disruption of long-term savings plans

A loan against fixed deposit helps maintain the deposit while providing funds at a relatively lower cost.

In many cases, borrowing is financially more efficient than breaking the deposit.

Final thoughts

A loan against fixed deposit is one of the most convenient secured borrowing options available today. Yet, confusion around the loan against fixed deposit interest rate leads many people to avoid it unnecessarily.

Most myths come from misunderstanding how the loan works alongside your deposit returns. In reality, it is often cheaper than unsecured borrowing, keeps your FD intact, and provides quick liquidity when needed.

By knowing the facts and comparing lender policies, borrowers can use this facility wisely without falling for common misconceptions.