What is Premature Withdrawal
Premature withdrawal refers to the early withdrawal of funds from an investment or savings scheme before its intended maturity or completion period. This may result in certain penalties, fees, or adjustments to the interest rates earned, depending on the terms and conditions of the financial product.
You may find yourself wanting to prematurely withdraw from your fixed deposit account due to an unforeseen expense or emergency. In such cases, it is essential to know the financial consequences of breaking your FD.
1. Closure penalties and lower interest rates
The rate of interest offered on fixed deposits tends to be higher for longer tenures. An FD with a longer tenure is set to fetch you better returns than a shorter-term FD this is because of the power of compounding. As you can see, a 4-year FD can yield returns up to 8.05% p.a., whereas a 1-year FD would offer 7.40% p.a. which is lower than the former. Also, if you wish to prematurely withdraw your FD, you will be charged interest as per the rate on the day of opening your account for the actual period your account was open.
2. Interest rates on a new FD may not be as good as your old one
In certain economic climates, interest rates on FDs may drop, and there is no guarantee that they will be as high as they were on the date you opened your account. Therefore, you are making yourself susceptible to lower interest rates by prematurely withdrawing your FD, should you wish to reopen an FD again shortly. What’s more, many financial institutions such as Bajaj Finance offer you assured returns that are immune to market fluctuations, so it is in your best interest to think deeply before withdrawing prematurely.
3. Changing FDs for a higher interest rate does not always pay
If you plan on closing your FD to reinvest the money with another issuer offering you a higher rate of interest, it will benefit you to first calculate the amount of money you would lose in premature withdrawal fees and lower interest. In most cases, once you have taken these fees into account, you may find that the new FD will offer you the same or sometimes lower returns on investment.
4. For immediate cash, it may be better to take a loan against your FD
If you need immediate financial assistance, it may be better for you to avail of a loan against your FD rather than break the FD. Loans against FDs offer you far better interest rates than personal loans. Most issuers will set the interest rate at one or two percent higher than the FD interest rate. What is more, with your FD still intact, you can continue to earn interest.
With Bajaj Finserv, your loan amounts, card limits and insurance is already approved. All you must do is simply share a few details and get money in bank with 1-step verification. You can check your pre-approved offer here.
A fixed deposit that offers you assured returns at competitive interest rates is a long-term investment that should not be broken lightly. If you require immediate funds, a loan taken against the FD is a far more financially prudent solution. If this does not work for you, you can easily withdraw your FD before maturity by making an easy online application. Choose an issuer who has a simple process of premature withdrawal to ensure that you have the liquidity you desire during your time of need.
5. Dip in overall earnings
When investors opt for premature withdrawal of fixed deposits (FDs) to invest in new deposits offering higher interest rates, they may face a dip in their overall earnings. This is because premature withdrawals are subject to penalties and other charges, which can offset the potential increase in earnings from the new deposit. As such, it’s important to weigh the costs and benefits before making any investment decisions.
How to avoid the penalty on premature withdrawal of FD
Avoiding penalties on premature FD withdrawal is essential for maximising returns. Here are to avoid the penalty on premature withdrawal:
- Opt for Flexi FDs: Choose banks offering flexible fixed deposits. Flexi FDs allow partial withdrawals without incurring penalties, providing liquidity while preserving the overall deposit.
- Loan against FD: Take loan against your FD. Many financial institutions like Bajaj Finance offer this facility, allowing you to meet financial needs without breaking the fixed deposit and incurring penalties.
- Emergency Fund: Maintain a dedicated emergency fund separate from your FD. This fund serves as a financial buffer, covering unexpected expenses and reducing the necessity for premature FD withdrawals. By having a safety net, you can protect your FD investment and avoid penalties associated with early withdrawals.
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