Should you break an FD or take a loan against it when you urgently need money? Experts explain
Economies around the world are enduring serious difficulties due to elevated oil and gas prices, driven by ongoing tensions in the Middle East between the US and Iran and the war between Russia and Ukraine. These developments have hampered supply chains and strained international relations.
In this backdrop, fixed deposits (FDs) continue to be among the most trusted, predictable investment options for savers and investors across the country. Still, it is vital to keep in mind that unexpected expenses such as medical emergencies, accidents, education costs, home repairs, and other urgent personal commitments can often overshadow an individual’s financial planning and leave investors wondering whether they should prematurely withdraw their FD or borrow against it.
The right choice in such scenarios depends entirely on a host of factors, including the urgency of funds, borrowing costs, repayment potential, long-term economic planning, the tenure of the requirement, and the penalty for breaking the deposit.
What do the experts say?
Vivek Chopra, COO – Retail Finance, Tata Capital Ltd, explains, “Before breaking a fixed deposit, it’s worth evaluating a bridge personal loan to meet urgent liquidity needs while your deposit continues to earn interest. Typically, a premature FD withdrawal leads to interest loss. It is generally a better option to take a personal loan for short-term requirements without burning your pocket. However, if the funds are needed for a longer duration, and the overall borrowing costs end up exceeding the premature FD withdrawal penalty, then breaking the FD may be more economical.”
On similar lines, Alok Kashyap, Executive Director and Head of Liabilities Product, Payments & Digital Business – Consumer Banking Group, DBS Bank India, shares his point of view in detail, stating, “Fixed deposits represent a fundamental component of our customers’ long-term financial planning, often linked to specific life goals. As such, maintaining the full term of these investments is important to realise their intended returns. To address unforeseen liquidity needs without compromising these foundational investments, DBS Bank India offers overdraft facilities against fixed deposits.”
He further added, “This solution can enable individuals to access immediate funds, leveraging their existing deposits, and navigate temporary financial challenges effectively. It is also important to note that premature withdrawal of a fixed deposit typically leads to a reduced interest payout compared to the originally agreed-upon rate. Therefore, offering an overdraft facility against a fixed deposit stands as a demonstrably more advantageous option for customers, preserving their investment growth while providing essential financial flexibility.”
What can be a practical solution to such challenges?
In most cases, when an individual faces financial challenges, a loan or overdraft against an FD is considered a practical solution for short-term cash requirements because it allows the deposit to continue earning interest while avoiding premature withdrawal penalties.
Furthermore, it is prudent to seek professional guidance from financial advisors to make meaningful decisions on a case-by-case basis. This is because guidance plays an important role in helping resolve such financial issues and challenges while also preserving long-term financial growth potential.
Therefore, as a sensible borrower, one should carefully compare the total interest payable on the loan with the financial loss from breaking the FD. If the borrowing cost over an extended period outweighs the penalty and forgone interest, encashing the FD could be the more cost-effective decision. Carefully evaluating both options, after professional guidance, based on the duration of the funding need and overall cost, can help investors make an informed financial choice.
