Premature withdrawal of a fixed deposit is withdrawing the amount locked for a tenor, before the tenor ends or before maturity. As you must be aware, an FD is a sum of money invested with a bank or a financial company over a tenor for a fixed interest rate for interest gains.
Once the FD reaches maturity, you are returned your principal (amount invested) and get the interest. However, breaking your fixed deposit can cause penalty payments and lead to other consequences that negate the benefits of FD.
Why choose fixed deposits?
As time passes, it becomes essential to save money and grow your savings with prudent investments. Fixed deposits are the safest option of investment. They offer you steady and attractive interest returns as income over a chosen tenor.
You can benefit from a range of advantages if you keep your FDs secure until maturity. These include the following:
- Fixed and steady income from interest gains
- Growing savings as they mature over the tenor
- Generating income for senior citizens after retirement
- Putting savings to good use
- Using interest income for additional expenses
You can also compute the returns from your FD before you invest by using a fixed deposit calculator.
Additional Read: What happens if you don't renew or withdraw your fixed deposits?
Consequences of premature withdrawal
Premature withdrawal usually involves your bank or financial institution charging you a penalty for withdrawing your FD before maturity.
2. Interest loss
Interest returns are what you get on a periodical basis from the bank over the tenor period. By withdrawing your FD prematurely, you are losing out on the interest gains you could have received by completing the tenor, which could cause a financial loss.
3. Prevention of growth
Every FD multiplies into an attractive amount over time. The longer the tenor, the more value is added to your FD. Once your initial investment grows, you can use it for holidays or purchases of assets. However, withdrawing your deposit prematurely hinders this growth, and you only get back the money you had invested. Thus, you would lose out on the matured amount of the FD.
4. Financial uncertainty
If you are retired and have invested in FDs for higher gains, premature withdrawal can cause a considerable amount of uncertainty. You would lose out on a source of finance, causing worries about funding expenses. Rather than this, taking a loan on your FD is more advisable.
5. Cumbersome procedure
As with most transaction procedures, you are even breaking of FDs comes with its share of formalities. These formalities involve filling forms and submitting a range of documents. Only after this can you get your invested amount back.
The premature withdrawal of a fixed deposit can have an adverse set of consequences. You should thus consider these factors before making the final decision of breaking your fixed deposits.
Here’s what to consider before breaking your FD
- Do thorough research on the terms and conditions of your FD
- Search for alternate modes of finance instead of breaking your FD
- These could be taking a loan against your FD or opting for a personal loan or line of credit
- Avoid breaking the FD at the end of the tenor period since this may incur a higher penalty. You should try to close your fixed deposit account on maturiity
- Always have a financial backup of other FDs, shares and mutual funds to support you when you need money for emergencies
- Keep about half of your finances liquid to help you access funds in times of needs
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