Need Rs 1 lakh? Should you break FD or take loan against it? Understand it with examples
Break FD vs Loan Against FD: If you want funds after investing in FD? In this situation, you have two options – either you break the fixed deposit or take a loan against it. But which option is best for you?
Break FD vs Loan Against FD: When it comes to safe investments, fixed deposit (FD) schemes are considered a popular option for investors. It not only offers safe investments but also guaranteed returns. When you invest in an FD, your money is locked in for a specified period. If you withdraw it before maturity, banks typically impose a penalty, leading to a loss of interest.
FD vs Loan Against FD: Which option is best for you?
But what if you want funds after investing in FD? In this situation, you have two options – either you break the fixed deposit or take a loan against it. But which option is best for you?
FD vs Loan Against FD: Know the answer
To know the answer it’s important to evaluate when it makes sense to break your FD and when to opt for a loan.
Understanding the Costs of Breaking an FD
Breaking your FD early incurs losses. According to SBI, if you withdraw your funds before the maturity date, you’ll earn up to 1 per cent less interest than initially promised.
Costs of Breaking an FD: Example
For example, if you have a 2-year FD earning 6.5 per cent and you break it early, you’ll receive interest at only 5.5 per cent. Additionally, you’ll incur a penalty: a 0.50 per cent fee for FDs up to Rs 5 lakh and a 1 per cent fee for amounts between Rs 5 lakh and Rs 1 crore.
Interest Rates on Loans Against FDs
When you take a loan against your FD, the amount you can borrow usually ranges from 90 per cent to 95 per cent of the FD’s value. The interest rate on the loan is typically 1-2 per cent higher than the interest you earn on your FD.
Loans Against FDs: Example
For example, if you have a 5-year FD with a 7 per cent interest rate, you might pay 8-9 per cent on the loan. The loan tenure aligns with your FD’s maturity, and it must be repaid before the FD matures. If you fail to repay on time, the loan will be settled with the FD amount. You can choose to repay either in a lump sum or in installments, based on your preference.
Deciding Between Breaking Your FD or Taking a Loan
If you need 30 per cent to 40 per cent of your FD amount, taking a loan against it is often the better option. This allows you to access funds without sacrificing your savings. For example, if your FD is Rs 1 lakh and you need Rs 30,000 to Rs 40,000, a loan against your FD is a practical solution.
Deciding Between Breaking Your FD or Taking a Loan
Conversely, if you require 80 per cent to 90 per cent of your FD amount—say you need Rs 80,000 from a Rs 1 lakh FD—it might be wiser to accept a small loss and break the FD early.