Investing money in a Fixed Deposit (FD) is one of the most traditional and safest ways to park your hard-earned money, generating guaranteed returns as per the prevailing interest rates. If you have already invested in an FD, you may face a situation where you need urgent cash. Premature withdrawal or a loan against FD can both be viable options for you.
This article will give an insight into both ways of accessing cash, and help you understand which option is better based on your requirements.
Premature Withdrawal: When you withdraw before maturity
A Premature or early withdrawal of an FD means that you are withdrawing the FD before it matures. This is possible and allowed, however, it comes with a penalty charge levied by the bank. The penalty amount varies from bank to bank, but it’s typically around 1% of the principal amount. Additionally, banks may charge a lower interest rate than what was offered at the time of investment.
Premature withdrawal is usually not recommended unless in a dire emergency, as the returns from FD decrease significantly when you withdraw them before maturity. However, if you still wish to withdraw, then it’s important that you check with your bank first to understand the terms and conditions, and the associated fees that might apply.
Loan against FD: When you need cash without withdrawing the entire amount
The second option is a loan against FD, which is another way of securing funds. In this case, the bank or the financial institution lends you money against the value of your FD. This way, you get the much-needed cash without breaking the FD or paying any penalty. A Loan against FD is becoming a popular financial product for its ease of use and zero-risk factor.
Interest Rate on Loan Against FD
The loan against fd interest rate is comparatively lower than personal loans offered by the bank. Here, the loan is secured against the bank’s deposit, which reduces the risk factor. The interest rate charged by most banks is 1-2% higher than the FD interest rate offered.
The following table provides a brief idea of the interest rates charged by some major banks on loan against FD:
Bank Name Loan against FD interest rate
HDFC Bank 2% to 2.5% above FD rate
State Bank of India 0.5% to 1% above FD rate
ICICI Bank 1% to 2% above FD rate
Axis Bank 1% above FD rate
Kotak Mahindra Bank 1% to 1.5% above FD rate
As seen above, the interest rate with each bank may vary, and it’s important to check with the particular bank to get the exact interest rate before applying for the loan against FD.
How does a Loan Against FD work?
A loan against FD is relatively easy to apply for. The process includes filling up a form, submitting your ID proof, and the bank may require you to sign a lien or a pledge to grant the loan against your FD. Once the verification is completed and the bank is satisfied, the loan amount will be credited to your account, and the bank will hold on to your FD as collateral until the loan is repaid.
But what if you fail to repay the loan?
In case you are unable to repay the loan amount on the due date, the bank has the right to recover the outstanding amount by liquidating the FD. The bank would recover the loan outstanding amount from the maturity or part of the FD amount.
Which is Better – Premature Withdrawal or a Loan Against FD?
In most situations, opting for a loan against FD is a better option than a premature withdrawal of your FD. If you choose a loan against FD, you won’t be charged a premature penalty, and you’ll earn interest on your FD until maturity. Additionally, by applying for a loan against FD, you can still obtain the required funds without losing earning potential on the FD and availing the benefit of a lower interest rate.
On the contrary, with premature withdrawal, you may lose out on the interest earned, even potentially paying a penalty charge. Furthermore, if you are reinvesting the amount after withdrawing the FD, then you may get a rate lesser than your previous FD Interest rate.
As per the above discussion it’s clear that a loan against FD is a better option, as it’s not only hassle-free and time-saving, but also offers a lower interest rate. Further, opting for a loan against FD means that you get much-needed cash without losing the earning potential of the FD or paying any penalty. It’s important to note that paying the loan on time is essential to avoiding unnecessary complications with the bank. Ultimately, the decision depends on your financial requirement, so make a wise decision that suits your needs.