What is Lien on Fixed Deposit? Understanding its Benefits and Risks

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

Fixed deposits are time-tested investment tools that work well as emergency funds. You can park your excess cash or savings into a protected fund and earn stable returns over time. This tool suits investors with low-risk appetites since their funds are preserved without losing value due to inflation.  

You must understand the meaning of the lien amount in case your FD acts as collateral for any credit instruments like home or education loans. This lien amount is the sum of your FD that lenders and other financial institutions may charge if you fail to clear pending dues or comply with the bank’s investment guidelines. 

What is the Lien Amount in FD? 

The lien amount on FD is the locked portion of your FD investment that a lender has the right to claim if you don’t fulfil the loan’s contract. Investors aren’t permitted to access this amount for withdrawal till the pending settlements are cleared. You can only transfer or cash out this lien amount once the bank authorities have greenlit your loan clearance. 

A classic example is when your FD is offered as collateral or security for any credit facility or loan. It allows lenders to position a lien on your account and restrict any premature activity like FD closure or withdrawal until you’ve cleared the loan. 

Benefits of Lien on FDs 

Investors can benefit from a lien on FDs in the following ways: 

• Quicker Loan Processing: Fixed deposit account holders with a lien marked on their investments typically get faster loan approvals. Expect quicker disbursal of funds since the FD acts as a ready security for the lender. 

• Immediate Credit Availability: Such lien amounts enable fixed deposit investors easy access to credit facilities. It includes credit cards or personal, education, and marriage loans. Simply offer your FD as security and get immediate enrolment to credit tools without breaking into your FD. Even better, you can manage financial emergencies without losing the accrued interest. 

• Enhanced Loan Terms: Having an FD lien means you’re in the front seat for more favourable loan terms compared to unsecured loans. Lenders and banks will offer lower interest rates since their risk is also low because of your collateral. It allows borrowers to leverage their FDs without losing their interest-earning potential. 

Also Read: What’s The Minimum Amount Due in Credit Card Bills 

Risks of Lien on FDs Amounts 

The risks come as an add-on despite the upsides. Be careful of the following disadvantages of a lien on your FD: 

• Fund Access Restrictions: The loan borrower or general investor can’t access or withdraw the FD funds until the lien is lifted. It limits financial flexibility since the lien amount only becomes accessible after the associated loan is repaid in full.  

• Room for Losing Your FD Amount: There’s a high chance of losing your FD balance if you’re a loan defaulter or fail to clear your credit lines in time. The lender may use the lien marked to recover the outstanding loan amount, leading to a loss of your investment. 

• Impacts Utility of Interest Earnings: Investors with a lien on fixed deposit investments may continue to earn interest but may be unable to use these funds to settle loan obligations. It affects their financial planning capability and utilisation of interest earnings.  

How to Avoid Lien on FDs 

You can avoid a lien amount on your FD through these strategies:

1. Maintain separate accounts for loan repayments and fixed deposits to prevent automatic lien by the lender. 

2. Use alternative assets as collateral for loans instead of your FD. 

3. Repay your loans religiously to avoid banks from exercising lien on any of your deposits as a recovery measure. 

4. Add several investment asset types to your portfolio, such as money market funds, public provident funds, and bonds. 

Also Read: Fixed Deposit Calculators: Convenience at Your Fingertips 

Disclaimer: The information provided in this article is generic in nature and for informational purposes only. It is not a substitute for specific advice in your own 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 taking any financial decisions based on the contents and information.