November 14, 2025 · 8 mins read
Santosh Kumar
Have you ever heard of the notion of borrowing money to invest in a fixed deposit (FD) to earn a spread on the interest? At first glance, it seems like a brilliant scheme—take out a loan at a lower interest rate, and invest in an FD with a higher interest rate to keep the difference. Sounds easy enough, right?
However, there are pros and cons associated with borrowing money to deposit into an FD, and it’s important to understand both before you take the plunge.
Fixed deposits (FDs) are one of the safest and most reliable investment options in India. They offer fixed returns over a specified period and are unaffected by market changes. In contrast, loans (either personal loans, business loans, or overdraft facilities) are an obligation of repaying borrowed money with interest over a period of time.
When folks are referring to the strategy of borrowing to invest in an FD are referring to an investment strategy where a borrower would borrow X money at an interest rate Y, and then deposit that borrowed money into an FD at an interest rate Z, where Z > Y, and profits from the difference of the FD interest payout and what they owe on the loan.
If we presume, as in this example, to borrow ₹10 lakh at 8% per annum, and deposit it into an FD at 9%, the difference of 1% (prior to taxes or any fees) appears to be an easy win. However, there are many costs and risks involved that complicate that decision more than it appears to be.
There are several reasons why someone might think of taking this route.
Stringent need for guaranteed returns - Fixed deposits are synonymous with low investment risk, offering a reliable interest income, so the prospect of receiving steady earnings from borrowed money can be alluring.
Leveraged short-term wins - Some view it as they are applying leverage (money borrowed) to enhance the value of savings or accumulate towards a financial goal rapidly.
Temporary cash flow advance - A few may consider it if they have already been approved for a loan, don't need funds immediately, and park the amount in a fixed deposit to earn interest until needed.
Business-related reasons - Entrepreneurs might use excess drawn from loans to earn a short-term interest return, awaiting a project to commence..
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When you invest your business loan into a fixed deposit (FD), it will provide fixed and guaranteed returns, in contrast to the ups and downs of an investment in the stock market. If you are risk-averse and want the predictability of returns on your investment, placing borrowed funds into an FD for the time being may be a safe place to store those funds.
If you have taken out a loan but have not yet invested the funds, you may want to park the loan in an FD for a short period in order to generate some sort of return instead of allowing the funds to be idle.
In unique scenarios, being in an FD while having a loan could provide liquidity. You can always break the FD for cash in an emergency or use the FD as collateral for an overdraft facility.
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Some businesses capitalize on time gaps — for example, a business loan may be obtained during favourable lending conditions with the intention of using the money until the project begins.
While the idea of profit from interest difference might seem clever, the practical implications often make it a losing proposition. Let’s explore why experts discourage taking a loan to invest in an FD.
Banks and financial institutions create their products to ensure profits. The typical rule of thumb is a higher interest rate for loans than the interest rate offered for an FD. For example, a personal loan may have an interest rate of somewhere between 10% and 16% while most FD returns are between 6% and 8%. Even if there are some FDs with a slightly higher return, once tax is taken, the FD return will almost never be greater than the cost of the loan.
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The interest rate earned on an FD is taxable within your income slab. For example, if your marginal income tax slab is at 30% and you receive an FD return of 8%, you are going to be effectively earning a net of around 5.6% on your FD. Loan interest is not usually tax-deductible for personal loans, and that further widens the gap.
Aside from interest, loans also have processing fees, prepayment penalties, and service fees, which diminish profits—sometimes, even a small percentage cuts total profit to zero!
Repaying a loan entails fixed monthly payments, but the interest paid on your FD is often paid quarterly or annually. This can create useful cash flow issues, which result in a strain on your finances instead of a benefit.
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Locking your borrowed money into an FD forfeits the option of deploying that borrowed money into other productive investments or paying other debt obligations that return you higher liability.
Even though, in theory, you might only earn a tiny bit, being in debt can add undue stress. Using borrowed money for the purpose of financing an investment simply because it offers a return—especially if the return is insignificant—may disturb your sense of well-being.
If you are looking to achieve greater growth or monetize your assets more effectively, here are the possible best alternatives:
1: Investing in high-yield investment vehicles like mutual funds or government-backed schemes that carry a moderate measure of risk.
2: Building an emergency fund, in advance of assuming any debt in relation to investing.
3: Using either a recurring deposit (RD) or a systematic investment plan (SIP) to build your savings gradually.
4: Paying your loans ahead of assuming any additional loans to invest, it saves you the additional cost of interest and reduces your overall financial burden.
These options will help keep you floating financially, as you can make your money work for you -- not have your money drown you.
The suggestion to borrow and invest in fixed deposits may seem savvy on the surface, but generally results in a net loss versus a net gain when executed. Loan rates are typically higher than fixed deposit rates, and after factoring in taxes and fees, the gap becomes even less favourable.
Financial professionals stress that borrowing should be used sparingly, and ideally in the pursuit of further building assets, education, an emergency fund, or for business purposes — not for arbitrage or speculation. Instead of calling it "earning" that debt, instead focus on disciplined savings, efficient investing, and wealth accumulation over the long haul.
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Yes, it is permissible, but not recommended. There are no prohibitions against using personal loan proceeds for anything; however, using them for the sake of an arbitrage against an FD may not work out well after you factor in your interest payments and taxes.
There may be a few rare instances, such as special promotional offers or corporate FDs that are paying extraordinary interest rates, where there might be some potential short-term gain. However, once the taxes are applied, the benefit disappears.
There may be instances where businesses might use such approaches for short-term asset-liquidity management, but even they will perform significant due diligence in cost–benefit analyses before they proceed.
Not a good idea at all. It is not advisable to use borrowed money to invest early in your career. Instead, develop saving habits, but more importantly, start an RD or SIP, which are both low-risk investment options for students.
Financial advice is to stay away from borrowing money just to obtain interest from FDs. The better plan is to focus on building an emergency fund, then ensure high-interest loans are paid off, and lastly, any extra money should be invested in long-term, diversified goal-oriented options that have the potential to earn you a healthy investment return.
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