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Perils of breaking your FD before maturity

Aug 26, 2019

Pune, Maharashtra: Making a premature withdrawal from your fixed deposit may seem to be the best option when you need quick funding for a short period, be it to pay for an unplanned medical treatment or undertake urgent home repair work. However, a premature withdrawal has certain negative consequences, due to which most financial experts advise against it.

Here’s why you shouldn’t break your FD before maturity:

Premature FD withdrawals come at a cost

Issuers charge a penalty when you withdraw finances from your fixed deposit prematurely. While the fee varies across issuers, it is generally calculated at a 0.5% to 1% rate on the total deposit amount. This means that your FD yields interest at a rate of 0.5% to 1% less than what you would have otherwise obtained for the length of the tenor completed. Effectively, you get liquidity, but at the cost of reduced returns.

By breaking an FD, you lose out on potential earnings

When you make a premature withdrawal, you do not receive the amount that was guaranteed at the time of booking the FD. For instance, assume that you have a 3-year FD worth Rs. 10 lakh that earns FD interest rate of 8.60%. As per these terms, your maturity proceeds would be as follows.

Deposit (Rs.) Tenor (Yrs.) Interest rate

(%)

Interest (Rs.) Maturity (Rs.)
10,00,000 3 8.60 2,80,824 12,80,824

Now, consider that you wish to liquidate your FD after 6 months of investment. Assume that the issuer offers 7% interest on a 6-month FD and charges 0.5% premature withdrawal penalty. The effective FD rate you get then is 6.5%. This is what your returns would look like in comparison to what they would have grown to if you hadn’t broken your FD.

Deposit (in Rs.) Tenor (in yrs.) Interest rate (in %) Interest (in Rs.) Returns (in Rs.)
10,00,000 0.5 6.50 31,988 10,31,988
10,00,000 0.5 8.60 42,113 10,42,113

You’ll notice that you earn at a considerably slower pace, fail to capitalise on compound interest and miss out on taking back bountiful returns when you break an FD.

RBI’s repo rate cuts imply lower FD rates in the future

After a slew of repo rate cuts, the RBI’s lending rate now stands at 5.4%. While a rate cut may bring good news to borrowers, as it reduces the interest rates on loans, it doesn’t necessarily reason for cheer for FD investors. This is because interest rates on both loans and deposits tend to move in line with the repo rate.

That said, what you can expect is that FD issuers will lower FD interest rates in the near future. This means that if you withdraw your FD before the tenor ends and plan to invest again at a later date, you may have to settle for a lower interest rate.

Now that you know the consequences of breaking an FD before maturity, here’s a better way to address your need for quick funds.

Avail a loan against fixed deposit

To help you address liquidity deficits during an emergency, issuers offer a loan against FD facility. Here, you are required to pledge your FD as collateral and in exchange, you secure a sanction ranging from 70% to 95% of the value of your fixed deposit. Further, you only pay an interest ranging from 1% to 3% above your FD interest rate, which makes it an affordable way to meet your need for funding.

For instance, when you opt for a fixed deposit from Bajaj Finance Limited, the lending and investment arm of Bajaj Finserv, you can avail a loan against your FD of up to Rs. 4 lakh, quickly and via an online application procedure. What’s more, the instant online loan against FD allows you to continue earning on your investment. So, instead of breaking your FD early, use it as collateral, stay invested for the entire tenor, and take back large returns.

Here’s what you can get with a Bajaj Finance FD when investing a sum of Rs. 10 lakh for a 5-year tenor with interest payouts at maturity.

Customer type Investment amount (in Rs.) Interest rate

(in %)

Tenor

(in yrs.)

Maturity Amount (in Rs.)
Regular 10,00,000 8.60 5 15,10,599
Senior citizen 10,00,000 8.95 5 15,35,098

One way to get more from your Bajaj Finance FD is by opting for the auto-renewal facility as it allows you to earn returns for a longer time and at an interest rate 0.10% higher than the rates prevailing. Similarly, you can invest in several deposits conveniently, with a single cheque, through the multi-deposit facility.

Here, you get returns without compromising on safety as the deposit programme carries ICRA’s MAAA and CRISIL’s FAAA rating, which is the highest credibility rating. So, take the next step and book an appointment with Bajaj Finance. An executive will reach out to you and help you set up your investment in no time at all!

For this purpose, Bajaj Finserv., through its lending and investment arm Bajaj Finance Ltd, offers Fixed Deposit at an attractive interest rates of upto 8.95%, so you can easily multiply your savings. Investing in a Bajaj Finance Fixed Deposit is very easy, and you can check your final maturity amount using an FD Calculator, before you start investing.

About Satya Singh

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