Fixed deposits are investment tools that offer secure, risk-free returns. Its features make the investment tool popular among investors. One of the main features of a Fixed Deposit (FD) is the tenure of investment. Fixed deposits need to be invested for a fixed period. Banks and financial institutions also state the minimum amount for Fixed Deposit. Investors can withdraw the interest amount periodically before the maturity period ends, but the principal investment amount can be received only after the tenure ends. However, in some cases, investors break an FD before the maturity period. The reason for breaking an FD can be the requirement of emergency funds. In this article, let us look at the consequences of breaking an FD.
Outcomes of breaking an FD
Below are some of the consequences of breaking an FD before maturity:
The penalty charged for breaking an FD prematurely will be mentioned in the terms and conditions of an FD agreement. The penalty and withdrawal procedure varies for every lender. The lenders charge a penalty of 1% on partial or full premature withdrawal of a fixed deposit. The penalty charges do not apply to a senior citizen or super senior citizen FD.
Lower interest rate
The main motive for creating a fixed deposit is the returns earned. When an investor breaks an FD, the interest rate applicable will be less. Interest on a fixed deposit is computed on a compound interest basis. The interest rate on fixed deposits withdrawn before maturity will be at the rate applicable during the first deposit opening. Early withdrawal means the loss of extra interest that can be earned till maturity. Calculate FD interest to know the amount of interest lost.
Premature withdrawal of a fixed deposit is not as easy and simple as opening an FD. There are various steps involved in applying for FD withdrawal and the bank approving it. An investor should fill out a form to apply for FD withdrawal. A review of multiple documents is made by the bank or financial institutions. This process can vary depending on the bank policy and the agreement signed while opening the fixed deposit.
Prevention of growth
The guaranteed returns from fixed deposits help investors to earn income regularly till the date of maturity. Most investors applying for an FD have a financial plan for utilising the cash flow. A bank or financial institution states the minimum amount for fixed deposit. It helps customers increase their earnings from the investment. Due to the early withdrawal of fixed deposits, the income earned will reduce.
Emergency need for the fund may cause an investor to withdraw the FD amount before maturity. However, for people earning a regular return from a fixed deposit, breaking it will cut down a major source of income.
Factors to consider before breaking FD
Investors must think about various factors before opting to break fixed deposits. Premature withdrawal will result in loss to the investors. The investor must calculate the loss due to lowered interest rate and penalty before the FD withdrawal.
Look for alternatives
Breaking an FD should not be the first thing an investor does when there is an emergency. There are multiple alternatives provided by lenders to allow investors to meet emergency financial requirements. A loan on a fixed deposit is one of the most popular alternatives. Depending on the amount and tenure of fixed deposits, banks provide loans on FD. Personal loans and instant lines of credit can be opted out instead of breaking an FD.
Have a financial backup
Uncertain events can occur at any time and you may require funds immediately. An individual must have backup plans to meet such emergencies. It can be in the form of shares, mutual funds or by keeping a portion of investments liquid.
Read the terms and conditions
Thorough research and a clear understanding of the lender’s fixed deposit policy will give insight into the consequences of premature FD withdrawal. An investor should calculate FD interest, the penalty charged and the payout period in detail while opening an FD account. As the policy changes from one lender to another, select a lender with the best-fixed deposit features.
The consequence of breaking an FD before maturity is not profitable to the investors. However, during an uncertainty when there is no other alternative, one can withdraw the investment. Avoiding additional charges and the cumbersome process of breaking a fixed deposit by selecting the right lender is essential. The steps of premature FD withdrawal can be simplified by choosing a renowned bank or financial institution.