Understanding Lien on Fixed Deposits: Benefits, Risks & How to Avoid It

Posted on Friday, July 19th, 2024 | By IndusInd Bank

Investors prefer fixed deposits (FDs) for their dependable returns and security. They help preserve and grow savings. However, understanding the concept of a lien on a fixed deposit becomes crucial, as it can affect investors in unexpected ways. 

This article covers the benefits and risks of liens on FDs and practical ways to avoid them. These measures ensure investors are ready for any potential issues. 

What is a Lien on an FD?

A ‘lien’ on an FD is a legal right or claim that a lender, a bank or financial institution, has over the proceeds of an FD. A lien arises when an FD is used as security for a loan or credit facility, and the FD Account is blocked to the extent of the loan granted. This lien ensures the FD holder cannot withdraw the funds prematurely or close the deposited account until the loan has been paid in full. 

Before you finalise your loan agreement, it’s crucial to understand the meaning of the lien amount to ensure you comprehend its financial obligations and implications. 

Benefits of Lien on FDs

Here’s how depositors can benefit from a lien on an FD: 

1. Credit Access: A lien on a fixed deposit account (FD) lets people use their FDs as collateral. They can use them to get credit facilities like credit cards, personal loans, and overdrafts. It can be convenient to access funds without prematurely breaking the FD. 

2. Lower Interest Rates: Lenders may charge lower interest rates on loans secured by FDs than unsecured loans. The reason is that FDs act as collateral. 

3. Preserving FD Benefits: The lien impacts neither the interest earned nor the FD’s maturity value. The Fixed Deposits (FDs) earn interest at a predetermined rate throughout the loan term. You can use the IndusInd Bank Fixed Deposit Calculator to project potential earnings and make informed investment decisions. This tool helps you estimate the returns on your FD, ensuring you clearly understand the benefits before committing to any investment. 

Risks of Lien on FDs

Risks exist wherever there are benefits. Some less-than-ideal results of a lien on a fixed deposit are as follows: 

1. Restricted Access to Funds: A lien limits the liquidity of an FD. The account holder cannot withdraw money or close the FD until the loan is repaid or the lien is removed. 

2. Possible Loss of FD: If the borrower defaults, the lender may break the FD to recover the unpaid balance.  

3. Effect on Credit Score: If borrowers default on a loan, their credit score may suffer, limiting their access to future credit opportunities. 

How to Keep Your FDs Lien-Free?

An FD should be allowed to reach maturity since that is how it will realise its full potential. It is best to stay away from liens. This is the approach you can take: 

1. Emergency Fund: Keep an emergency fund large enough to cover three to six months’ costs. You can utilise this fund to meet immediate financial needs without putting a lien on an FD. 

2. Planned Borrowing: If you anticipate the need for credit, ensure that you plan the borrowing rather than using the current FD as collateral. 

3. Insurance Coverage: You can get enough insurance when you buy life, health, and critical illness policies. 

4. Diversified Investments: To ensure easy access to money, diversify your investments. Include a mix of liquid assets, such as money market funds, savings accounts, and short-term bonds. 

Also read: Smart Ways To Diversify Your Portfolio With Fixed Deposits 

When needed, a lien on an FD can help get credit. However, it has risks and limits on liquidity. Investors need to weigh its pros and cons. They should do this before they pledge FDs as collateral. When you balance emergency cash and long-term investments, it stops FDs from being under liens. In the end, stable and secure finances are guaranteed by wiser financial decisions. 

Empower your financial future now with a savvy IndusInd Bank Fixed Deposit. Unlock insights to boost benefits and shield against risks with expert guidance. 

Disclaimer: The information provided in this article is generic and for informational purposes only. It is not a substitute for specific advice in your circumstances. Hence, you are advised to consult your financial advisor before making any financial decision. IndusInd Bank Limited (IBL) does not influence the views of the author in any way. IBL and the author shall not be responsible for any direct/indirect loss or liability incurred by the reader for making any financial decisions based on the contents and information.