2023-12-19 09:02:00
Loan Against Fixed Deposits: A Better Option Than Breaking Your Fixed Deposit
When faced with a sudden need for additional funds, it is common for individuals to consider dipping into their savings. Many people have an aversion to taking out loans, and while this mentality is understandable, there are instances where borrowing may be a better option.
For individuals with a fixed deposit (FD) in place, breaking the FD to access cash may seem like the only solution. However, in most cases, it is possible to take out a loan against the FD, which can be a more beneficial alternative.
While breaking an FD may seem like a quick fix for obtaining the required funds, there are some disadvantages to consider. For example, if you have a two-year FD with a 7 percent interest rate, breaking it prematurely could result in the bank offering a lower interest rate for a one-year FD, typically around 6.5 percent. Additionally, some banks may charge various fees, ultimately reducing the overall interest earned on the FD to around 5.5 percent.
On the other hand, choosing to take out a loan against the FD presents several benefits. Not only is it often cheaper than a normal personal loan, but it also allows individuals to retain the safety and continuity of their savings until the FD reaches maturity.
Borrowing against an FD typically incurs an additional interest rate of 1.5-2 percent, meaning that a loan against an FD with a 7 percent interest rate could result in an 8.5-9 percent interest rate. While this may seem like a higher interest rate compared to the FD’s earnings, the security of the savings is preserved, and the funds continue to earn interest until the FD matures.
In conclusion, for individuals facing a sudden need for funds, opting for a loan against an FD may prove to be a more financially sound choice than breaking the FD. By considering the benefits and drawbacks of both options, individuals can make informed decisions regarding their financial needs.
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