In banking, LAD stands for Loan Against Deposit.
This is a type of loan where a bank provides credit to a borrower using their existing fixed deposit (FD) or other eligible deposit accounts as collateral. Essentially, you're borrowing money using the money you already have deposited in the bank.
Here's a more detailed breakdown:
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Collateral: The key feature of a LAD is that the loan is secured by the borrower's deposit account. This significantly reduces the risk for the bank.
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Loan Amount: Typically, banks offer a loan amount that is a certain percentage of the deposit amount. This percentage can vary, but is often in the range of 75% to 95% of the deposit value. For example, if you have a fixed deposit of $10,000, you might be eligible for a loan of $7,500 to $9,500.
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Interest Rate: The interest rate on a Loan Against Deposit is usually slightly higher than the interest rate being earned on the underlying deposit. The difference represents the bank's profit and covers the risk associated with the loan.
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Repayment: Repayment terms are flexible and can be structured as equated monthly installments (EMIs) or as a lump-sum payment upon maturity of the deposit.
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Advantages:
- Convenience: Easy access to funds without breaking the deposit and losing interest.
- Lower Interest Rates: Generally lower than personal loans or other unsecured loans.
- No Credit Check: Because the loan is secured, a credit check might not be as stringent.
- Continued Interest Earning: The deposit continues to earn interest while the loan is outstanding (although the interest rate difference effectively reduces the net benefit).
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Disadvantages:
- Limited Loan Amount: The loan amount is limited to the value of the deposit.
- Interest Rate Difference: The interest paid on the loan is higher than the interest earned on the deposit.
Example:
Suppose you have a fixed deposit of $5,000 earning 5% interest per annum. You need $4,000 for an emergency. Instead of breaking the FD (and potentially incurring penalties), you opt for a Loan Against Deposit. The bank offers you a loan of $4,000 at an interest rate of 7%. You continue to earn 5% on your $5,000 deposit, and you pay 7% interest on the $4,000 loan. This is often a more cost-effective solution than prematurely closing the FD.
Loans Against Deposits are a useful financial tool for individuals who need short-term liquidity without wanting to liquidate their investments. They offer a convenient and often cost-effective borrowing solution.
