Curated By: Business Desk
Last Updated: August 07, 2023, 12:16 IST
Breaking FD incurs a penalty of around 1%.
Having an FD with a bank allows you to take a loan against it when needed.
When troubled by a financial emergency, people often explore various available options. If you have a fixed deposit (FD) in the bank, the thought of breaking it might cross your mind. However, it’s essential to understand the potential losses associated with premature FD withdrawal. Similarly, personal loans can prove costly in such situations. As a result, one viable alternative that remains is opting for a loan against your FD.
Having an FD with a bank allows you to take a loan against it when needed. Knowing when to break the FD and when to opt for a loan against it is crucial.
Disadvantages of Breaking FD
Breaking a premature FD incurs a penalty of around 1% and possible additional charges. This can drastically reduce the interest earnings compared to the fixed rate. For example, a 2-year FD at 7% may only fetch an interest rate of 5.5% if broken early. Carefully consider the consequences and explore alternatives like taking a loan against your FD to avoid significant financial losses.
To Break or Not to Break: A Decision Guide for FD Holders
To safeguard your finances, it’s best to avoid breaking your FD when you need 20-30% of the total amount. If your FD has matured for at least 6 months, refraining from breaking it is a wise move. Instead, opt for a loan against your FD as a better alternative. In dire emergencies, breaking a newly opened FD may become a last resort, but only after exploring all other available options. Exercise this choice with utmost caution to prevent any avoidable financial setbacks.
What Advantages or disadvantages of taking a loan against FD?
Taking a loan against your FD presents a cost-effective alternative to conventional personal loans. Even with an FD earning 7 per cent interest, the loan’s interest rate would only be marginally higher, ranging from 1.5 to 2 per cent. Although it might appear slightly pricier initially, this method safeguards your savings, enabling your FD to mature undisturbed. By repaying the loan while using your FD as collateral, you preserve its security and potential advantages for future use.
