Fixed deposits have long been a favored investment avenue, offering a secure and predictable way to grow one's savings. However, circumstances may arise where the need for funds prompts individuals to consider premature withdrawal of their fixed deposits. This financial decision, while providing immediate liquidity, comes with consequences that extend to the interest earned on the deposit. Understanding the implications of premature withdrawal is crucial for investors, as it can impact the overall returns on their investment. In this article, we will understand the dynamics of premature fixed deposit withdrawal and its subsequent effects on interest calculations, shedding light on the considerations and potential drawbacks associated with this financial maneuver.
What is the premature withdrawal of a fixed deposit account?
Fixed deposits offer the flexibility of premature withdrawal, allowing you to close the account before its maturity date. Nevertheless, availing this option usually incurs a penalty fee imposed by the bank or financial institute. The purpose behind this penalty is to discourage frequent withdrawals and encourage a savings discipline. It's worth noting that some banks or financial institutes may permit FD withdrawal without imposing any penalty fees.
How premature withdrawal of FD affects interest rate
Let’s assume that you’ve invested a sum of Rs. 10 lakhs over a tenor of 48 months, with an interest rate of 8.05% This interest rate is set for 48 months. Say you want to withdraw the FD after 12 months. The interest will be calculated at the former rate, which was the interest rate on a one-year FD when you first opened the fixed deposit.
So, before you choose premature withdrawal, do the calculation and be prepared to receive lower returns. If not, try to fund emergencies using other modes of finance like personal loans, cash reserves, or the sale of an asset. This way, you can keep your FD intact until the lapse of the tenor.
How to calculate penalty on premature withdrawal of fixed deposit?[
Depending on the lender you have chosen, you may have to pay a significant sum of money as a penalty. This could range from 0.50% to even up to 2% of the FD amount. So, before you prematurely close your FD, ensure that you are prepared to pay this penalty.
Choose a lender that makes premature withdrawal easy and has flexible terms. Consider opening a Fixed Deposit with Bajaj Finance, which charges a low premature withdrawal fee while offering an attractive rate of interest on FD.
Losing interest if you withdraw and re-invest
In some cases, you may withdraw your FD to invest in another FD offering a higher interest rate. It could be a wise decision if you profit after paying the penalty charges. If not, keeping your FD intact makes more sense.
How you can avoid premature withdrawal while ensuring liquidity
You can look at various methods as below to avoid early liquidation of fixed deposits:
1. Laddering FDs using multi-deposit facility
You can use the multi-deposit facility with Bajaj Finance FD to split your investment amount into multiple FDs, each having a different maturity timeline and interest payout frequency. This will ensure you have a steady stream of FDs maturing in succession. Hence, whenever you need cash, you can utilize this money without going for a premature withdrawal.
2. Non-cumulative FDs
Try to keep some FDs in the non-cumulative mode to earn a fixed payout each month. You can use this surplus money to either pay recurring expenses or to tackle emergencies. Sometimes even a fixed income each month helps tremendously in creating a sum in use.
You can set your interest payout frequency as monthly, quarterly, half-yearly, or annually with the Fixed Deposit interest Rate Calculator.
3. Short-tenor FDs
If you are unsure of the time duration you might need your money, go for short FDs starting 12 months with Bajaj Finance FD. Short tenor FDs will also help you safeguard your investment against inflation.
4. Loan against FD
Instead of breaking your FD, you can consider taking a loan against fixed deposits. This is a wise move that prevents you from depleting your finances while also ensuring enough liquidity to help you meet your emergency needs. In addition, this is a low-cost loan as you only must pay a marginal interest rate, over and above the interest you are earning.
You can use online tools such as My Account, your online fixed deposit account, set interest payment frequency, apply for a loan against FD, and manage multiple FDs online.
As you see, with thoughtful planning of your FD investments, you can avoid liquidating your fixed deposits before the maturity timeline. However, if you have to liquidate your fixed deposits, ensure that you’re aware of the various withdrawal terms set by your lender. These terms may change periodically, so make sure you’re aware of these beforehand.
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