September 26, 2018
A good investment strategy includes a healthy mix of risky and safe investment tools. Among the safe tools, Fixed Deposits (FDs) are most popular among Indians. With an FD, you invest a lump sum and that money grows through a predetermined rate of interest over time. Keeping your FDs secure and untouched boosts your savings steadily.
Withdrawing an FD prematurely
While allowing an FD to mature gracefully over time would be the ideal situation, sometimes an unforeseen emergency might push you to premature closure of fd . This could result in a few pros and cons that you should know about.
Though there are penalties on interest for premature withdrawal of your FD, you get the complete amount you deposited. This money helps you handle the emergency at hand.
A premature withdrawal of your FD affects the interest rate for the time the FD was held. You will now get a lower interest rate. The bank or financial institution is likely to deduct 0.5% to 1% from your interest rate as penalty charges.
For instance, Kunal invested Rs 1 lakh in an FD for a year at 9% interest rate p.a. However, the interest rate for 7 months was 6%. Due to his mother’s health issues, he had to break his FD at 7 months and 3 days. If he had continued his FD, he would have got Rs 9000 as interest at the end of the year. But, since he withdrew prematurely, his interest rate not only dropped to 6% but he had to also suffer an additional penalty of 1%. Now, he stands at receiving only Rs 2500 as interest at the rate of 5%.
Instead of enduring such loss of money due to premature withdrawal of FD, he could’ve chosen to take a loan against the FD to tackle the emergency.
However, this too comes with its own pros and cons.
* You get the option to repay the loan with interest with the F
D’s money at maturity. Although, there might be some lenders that insist on the interest being paid regularly, while the principal amount can be settled post-maturity.
* Since it is a secured loan against the FD, there is minimal paperwork.
* You could get the loan sanctioned within a day.
* The loan tenor cannot be more than the tenor of your FD.
* You don’t get to choose the tenor or the loan’s rate of interest.
* Until you repay the loan, you can’t close your FD.
* If you are unable to repay the loan, the lender will settle it by closing the FD and claiming the amount from it.
When you are faced with an emergency, choose wisely between breaking your fixed deposit and taking a loan against it. Ideally, the loan is a better way to go as it gets you money without affecting your FD or its interest rate. If you’re still confused, there are fixed deposit premature withdrawal penalty calculators available to help know your loss and decide accordingly. The another option is that you can also choose short term fixed deposit which lessen the chances of withdrawing FD before maturity.
To know more about how a premature withdrawal of your FD can affect the interest you earn, click here.
If you ever need a loan for an emergency, you could also take one from different lenders. You can also continue with Bajaj Finserv as they offers a host of financial products to help you make all your money-oriented decisions. They offer pre-approved loans, should you ever need it. All you have to do is share a few details and check out your pre-approved offer.
Breaking an FD can have adverse effects on your interest and brings with it some losses too. Unless you really need the money, think hard before you make your choice. There are loans against FDs also available which are a much-preferred alternative to breaking FDs. You can use a fixed deposit premature withdrawal penalty calculator to help you make your decision.