Why Should You Not Break FD? Instead, Do This

Why Should You Not Break FD? Instead, Do This

FD or Fixed Deposits, also synonymized as Term Deposits, allow investors to perk their in a fund for a fixed tenure. One can either opt for a regular payout o withdraw the principal amount together with the accumulated interest at maturity. If you go for the one-time payout at maturity, you will not be able to withdraw money from your FD or you will be charged with a prematurate withdrawal fee. Many advise against premature withdrawal from FD due to many reasons. Before you decide to break your FD, you must know what are the impacts of breaking an FD. You must further know if you have any alternatives. 

Why people break their FD?

This can be due to various reasons. No one knows when someone might be in dire need of additional money. It’s during those emergencies when people are left with no choice than breaking their FD. People usually don’t look forward to taking loans from banks to avoid the steep rates and tight payback timeline, so they consider breaking of their FD as a better option as it’s their own hard-earned money. 

Effects of breaking an FD prematurely

Breaking an FD may be an easy solution to any financial crisis. But you must analyse the aftermath. Here are what can happen when you break your FD before reaching maturity. 

Lower interest rates and lower returns

Whenever an FD is broken prematurely, the account holders become subject to a lower interest rate than what the original paper-work proposed. Instead of the pre-decided FD interest rate, the reduced interest rates is applied to your FD. For example, if you started an FD with an interest rate of 8% and opt for a premature withdrawal, the interest rate will be reduced to 7% or to a rate as per your bank’s terms and conditions. Instead of the pre-decided 8%, you will receive interest at 7%. Hence, premature withdrawal reduces the interest rates and consequently, the returns. 

Premature withdrawal penalty

Unplanned breaking of an FD can levy a penalty on the received amount. A sudden retraction in the FD causes a void in the financial system, which has to be filled immediately to continue the smooth flow of cash. Thus, a certain percentage of the sum is fined on account holders for early retraction of FD capital. This percentage of the fine could be from 1% to 3%, depending upon the bank the FD was authorised from. A penalty on the received amount will further reduce your returns.

Note that some banks may not charge a premature withdrawal fee. This is a factor you must keep in mind when you compare fixed deposit. If your respective bank does not charge any penalty, you can save some of your money. 

Alternatives to breaking FD

Though desperate times call for desperate measures. However, there are various other methods that one may use, rather than breaking an FD.

Loan against FD

Short-time liquidity is available, which helps account holders to retract up to 90% of their invested amount at a go. This liquidation of the retracted amount will serve as a loan and will have a similar rate of interest as any bank loan. The left amount in the FD will continue to mature and the account holder can simply pay back the amount after a certain time along with the rate. Loans against FD comes with lower interest rates than a personal loan and are easier to get approved.

Divide your money multiple FD

Opening more than one small FD’s rather than a large FD is a very wise and tactical method of investment strategy. You can invest your money in two or more fixed deposits with both short and long tenure. In case of any emergency, you can break the FD with short tenure to meet urgent requirements and keep the FD with the long tenure for yielding expected returns. Thus, you can get the benefits of both long-term and short-term tenures. 

When is it financially right to break an FD?

This action can be taken if one can carefully compare fixed deposit. Suppose you have found an FD that offers a greater interest rate and benefits, only then is it a wise decision to break your existing FD and invest the amount in the new FD to ensure higher returns. But, note that if the old FD is near to its date of maturity, it is probably better to get it matured. 

Fixed deposits are one of the best methods available for investing money. Needless to say, before investing in any fixed deposit, one does a thorough comparison. Breaking an FD requires consideration as well. If the reduced interest rates and penalty reduces your returns to great length, it is better to think about the alternatives.

Elishay Smith

Lynn Redmile is a blogger and writer. She loves to express her ideas and thoughts through her writings. She loves to get engaged with the readers who are seeking for informative content on various niches over the internet. techmeshnewsofficial@gmail.com