Premature FD and Loan Against FD - Which Option Should You Choose?

Fixed Deposits (FDs) are among the most trusted investment options for building secure savings. However, when you face an urgent financial need, breaking your FD before maturity or taking a loan against it often becomes a dilemma. Both options, premature FD and loan against FD offer quick liquidity, but their implications differ in terms of returns, charges, and flexibility. To make the right financial decision, it’s important to compare both options in detail and understand how each one works.

Need urgent funds without breaking your FD? Apply for a loan against FD and retain your investment growth.

Premature withdrawal of a Fixed Deposit means taking out your money before the FD reaches its maturity date. While this provides immediate access to funds, it comes with certain drawbacks. Banks and NBFCs usually levy a penalty on early withdrawal, and the interest you earn is reduced compared to the contracted rate. As per RBI guidelines, if a fixed deposit is withdrawn prematurely after six months from the date of booking, the interest payable will be 2% lower than the rate applicable to a public deposit for the actual period the deposit remained with the NBFC. If no rate is specified for that period, the interest will be 3% lower than the minimum rate at which public deposits are accepted by the non-banking financial company.

A loan against FD allows you to borrow money by pledging your existing fixed deposit as collateral. Instead of breaking your FD, you continue to earn interest on it while availing a loan, typically up to 75% of the FD’s value.

This loan can be in the form of a term loan, offering repayment flexibility. You only pay interest on the utilised amount, making it a smart alternative to premature withdrawal.

Want to unlock funds without affecting your FD returns? Get a loan against FD today.

Both options serve different purposes. Here is a quick side-by-side comparison to help you decide which suits your needs better.

When you opt for premature withdrawal, two key factors determine the payout: the applicable interest rate and the penalty.

1. Reduced interest rate: You do not earn the original contracted rate but the rate applicable for the period you held the FD.
2. Penalty deduction: A penalty of  2% to 3% is deducted from the effective interest rate.
3. Reduced maturity value: The premature amount you receive is the principal plus reduced interest, which is generally lower than expected maturity proceeds.

Example: If you booked a Rs. 5 lakh FD for 3 years at 7% p.a. interest but withdraw after 1 year, the applicable rate may reduce to 5% p.a., and after a 2% penalty, you effectively earn 5% p.a.

Need an alternate solution? Borrow against your FD and avoid losing interest.

Interest on a loan against FD is typically linked to your FD rate. The lender may charge up to 2% higher than the FD interest rate. For example, if your FD earns 7%, the loan interest may be up to 9%. Here is how it compares:

The benefit lies in liquidity without disturbing your savings. Your FD remains intact while the borrowed funds serve your immediate needs.

Applying for a loan against FD is quick and straightforward. Here is how it works:

Eligibility criteria:

• The FD must be in your name or jointly held.
• It should be issued by the same bank/NBFC from which you’re applying for the loan.

Documents required:

• FD receipt or certificate
• PAN
• Any one of the Offically Valid Documents (Aadhaar, Passport, Driving License, Voter ID Card, Letter issued by National Population Register, NREGA Job Card, )
• In case OVD does not have the current address, below listed documents which are treated as Deemed to be Officially Valid Documents (DOVD)
• Utility bill, in the name of the client, which is not more than two months old from any service provider (Electricity, Telephone, Post-paid Mobile Phone, Piped Gas, Water bill)
• Letter of Allotment of Accommodation from Employer issued by State Government or Central Government Departments, Statutory or Regulatory Bodies, Public Sector Undertakings, Scheduled Commercial Banks, Financial Institutions, and Listed Companies, and Leave and License Agreements with such employers allotting official accommodation

Application process:

1. Visit your bank’s/ NBFC’s branch or online portal.
2. Fill in the application form and submit the required documents.
3. Use the term loan facility.
4. Once approved, funds are usually disbursed within hours.

Choosing between premature FD and loan against FD depends on your financial needs and repayment capability.

Choose loan against FD when:

• You need funds for a short duration.
• You do not want to lose FD interest.
• You can repay comfortably within the FD tenure.
• You want to maintain your investment for future goals.

Opt for premature FD withdrawal when:

• You need the full FD amount immediately.
• You cannot manage monthly EMIs or overdraft interest.
• You plan to reinvest in a higher-return product.

Tip: Always compare the total cost of borrowing versus the loss in interest before deciding.

While taking a loan against FD is convenient, a few common mistakes can reduce its benefits. Keep these precautions in mind:

Common mistakes:

• Borrowing the full eligible limit without assessing repayment ability.
• Ignoring the interest difference between FD and a loan.
• Letting the FD mature before repaying the loan.
• Using the loan for non-essential spending.

Precautions:

• Track your loan and FD maturity dates carefully.
• Always pay interest on time to avoid default.
• Ensure that your FD remains lien-marked to the lender until repayment.
• Compare lenders’ terms before applying.

Both premature FD withdrawal and loan against FD serve as convenient ways to access funds in emergencies. However, the smarter choice often depends on your situation. If your need is temporary and you wish to retain your investment returns, a loan against FD is generally more cost-effective. On the other hand, if you need the entire FD amount or cannot manage repayments, premature withdrawal may suit you better. Assess your financial goals, urgency, and repayment comfort before choosing.

Need instant funds while your savings continue to grow? Apply for a loan against FD and get liquidity within hours.