What is Best Option to Arrange for Urgent Funds-FD Withdrawal or Loan Against FD?

Over 58% of household financial savings in India have their fixed deposit accounts this is because it is a safe and fixed interest option of investment. When faced with an urgent financial need, many investors consider breaking their Fixed Deposit or taking a loan against FD. Both options have their advantages and drawbacks and choosing the right one depends on various factors. Choosing the right option can significantly impact their financial objectives with premature FD withdrawal penalties and low-interest FD loans.

What is a Fixed Deposit (FD)?

Fixed Deposit (FD) is a financial instrument offered by banks and financial institutions where individuals deposit a lump sum amount for a fixed tenure at a predetermined interest rate. FDs are known for their safety, stability and guaranteed returns hence they are the preferred investment option.

Why Do People Invest in Fixed Deposits?

• Guaranteed Returns: FDs offer fixed interest rates with predictable earnings
• Low Risk: FDs are not affected by market fluctuations unlike market-linked investments
• Liquidity: Can be withdrawn prematurely in case of fund emergencies
• Loan Facility: Banks offer loan against FD at lower interest rates
• Tax Benefits: Certain FDs provide tax exemptions under Section 80C of the Income Tax Act

Premature Withdrawal of FD

Breaking an Fixed Deposit before maturity lets the investor access to funds but comes with penalties and loss of interest earnings. Let us see the impact of FD withdrawal on savings.

Pros & Cons of Breaking FD Before Maturity

Find below the detailed table for pros and cons of FD withdrawal.

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What is Loan Against FD?

Loan against FD facilitates individuals to borrow money using their FD as collateral. The bank provides a loan amount, typically 70-90% of the FD value, at an interest rate 1 to 2% higher than the FD rate.

Pros & Cons of Loan Against FD

Should You Make FD Withdrawal or Take Loan Against FD?

When to Break Your FD?

• Urgent financial need exceeding FD loan eligibility.
• No ability to repay a loan.
• FD is close to maturity having minimum interest loss.
• Penalty charges are minimal.

When to Take a Loan Against FD?

• Need funds but want to retain FD benefits.
• Lower interest rate compared to personal loans.
• Short-term financial requirement.
• Avoiding premature withdrawal penalties.

Additional Considerations

1. Extend Loan Tenure: Opt for a longer repayment period to ease financial burden.
2. Avail Top-Up Loan Facility: Some banks offer additional funds along with FD loans.

Important Tips Best Way to Use FD in Financial Emergency

Compare interest rates and penalties before deciding. Banks impose premature withdrawal penalties, typically 0.5% to 1% lower interest on the withdrawn amount. Loans against FD generally have 1-2% higher interest than the FD interest rate but are still lower than personal loan rates.

Evaluate repayment ability before opting for a loan. Check the EMI structure to see if monthly payments fit your budget. If you miss payments, your FD may be liquidated by the bank to recover the loan.

Consider tax implications of FD withdrawal. If the FD is tax-saving under Section 80C, withdrawing before five years results in losing the tax benefit. Banks may deduct TDS on the accrued interest.

Check loan eligibility criteria with your bank. Most banks provide 70-90% of the FD value as a loan. Some banks require minimum FD tenure completion before granting a loan.

Both options serve different financial needs. If you require immediate funds without repayment obligations, breaking your FD may be suitable. When you want to retain your FD benefits while accessing funds, a loan against FD is a better choice. It is, therefore, necessary to first assess your financial situation carefully before making a decision.

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