Home Finance What You Stand To Lose By Breaking An FD?

What You Stand To Lose By Breaking An FD?

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What You Stand To Lose By Breaking An FD?
fixed deposits

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:

Penalty 

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 The interest rate on fixed deposits withdrawn before maturity will be at the rate applicable during the first deposit opening.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.

Tedious process 

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.

Financial uncertainty

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.

Conclusion 

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.

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Oliver James is a UK-based professional blogger, content writer, and content marketer who writes about travel and tourism, finance, real estate, and other topics on his blog. Passionate about writing, traveling, and getting the best deal on everything he buys, Oliver also writes for customers and helps them publicize their products, and services in the US and UK markets. He is a traveler who has visited over 35 countries and loves his job because it gives him the opportunity to find stories, experiences, and places which he can share with his readers. Oliver James is a professional blogger, content marketer, traveler, and electronics enthusiast. He started blogging in 2016 and has become a contributing writer for several blogs, including Android Authority and Elecpros. Oliver has also published his own informational books with Kindle Direct Publishing on subjects like Flappy Bird and Google Cardboard. Also Read: > <a href="https://www.zippyholidays.co.uk/all-inclusive-holidays.html">all inclusive holidays</a> > <a href="https://nedeserv.com/lumber-takeoff-services/">Lumber Takeoff Services</a> <a href="https://healthver.com">Thanks For Reading</a> We are <a href="https://webblog.com.au">Content Writing Agency Australia</a>. We are a team of creative writers, passionate storytellers, and dedicated content creators committed to producing high-quality written pieces that capture your business’s unique voice. Our mission is to provide engaging, meaningful content that resonates with your target audience and helps you reach your goals. Tech Articles Sample: <a href="https://techthrow.com/macos-ventura-discover-all-the-new-features/">macOS Ventura</a> | <a href="https://techthrow.com/sony-xperia-1-iv-everything-you-need-to-know/">Sony Xperia 1 IV</a> | <a href="https://isoftwareshops.com/comparison-and-differences-iphone-14-vs-iphone-14-pro/">iPhone 14 VS iPhone 14 Pro</a> | <a href="https://isoftwareshops.com/comparison-iphone-13-vs-iphone-14-all-the-differences/">iPhone 13 VS iPhone 14</a> Educational Articles Sample: <a href="https://allitebookss.com/what-are-the-radio-communication-protocols/">Radio communication protocols</a> | <a href="https://allitebookss.com/how-to-create-computer-software/">Create computer software</a> | <a href="https://allitebook.xyz/what-is-the-difference-between-the-deep-web-and-the-dark-web/">Difference between Deep web & Dark web</a> | <a href="https://allitebook.xyz/the-difference-between-software-and-an-app/">Difference between software & an app</a> | <a href="https://webblog.com.au/blackboard-dcccd/">Blackboard DCCCD</a> Sport Articles Sample: <a href="https://sportsmatik.com/sports-corner/sports-know-how/carrom/">Carrom History</a> | <a href="https://sportsmatik.com/sports-corner/sports-know-how/swimming/">Swimming History</a> | <a href="https://sportsmatik.com/sports-corner/sports-know-how/arnis/">Arnis History</a> | <a href="https://sportsmatik.com/sports-corner/sports-know-how/dog-surfing/">Dog Surfing History</a> | <a href="https://sportsmatik.com/sports-corner/sports-know-how/extreme-ironing/">Extreme Ironing History</a> | <a href="https://sportsmatik.com/sports-corner/sports-know-how/sepak-takraw/">Sepak Takraw History</a>