Emergency fund | Premature Withdrawal From Fixed Bank Deposit Vs Loan Against FD: Knowing The Best Option
Withdrawing a fixed deposit vs a loan against FD: Knowing the best option
New Delhi: The Covid-19 pandemic and the nationwide lockdown put in place to contain the spread of the virus have hit the economy hard. While many employees have lost their jobs, many have witnessed pay cuts. In such a situation, it is obvious that one will be faced with short term financial stress.
While it is advisable to have a contingency fund to overcome financial emergencies, very few manage to have one. In such a situation, taking out a loan is the only option. Here are some options from which you can avail an emergency loan.
A loan against FD is one of the fastest ways to raise money in an emergency. Most banks allow customers to take out a loan online through net banking.
If you have a fixed deposit (FD), you can get an instant loan by pledging this FD in an emergency. It is one of the best sources to meet immediate financial needs as the amount of the margin is very less and one can get up to 90-95% of the deposit amount as a loan. Typically, banks charge 2% more than the FD rate as the interest rate on these loans.
Premature withdrawal from a fixed deposit
However, if you are looking for funds in an emergency, you have the option of taking out a loan against FD or withdrawing it prematurely. How to choose between the two options?
In this case, you need to decide based on your fund requirements.
Most banks offer 90% of the amount of the FD in the form of a loan. A few offer 85% on the lower side, and on the upper side, some offer 95%. If you have a Rs 1 lakh FD, you can get between Rs 85,000 and Rs 95,000 as a loan.
Suppose you only need Rs 60,000 urgently. It would make sense to take out a loan instead of withdrawing it prematurely. This way, you can pay off the loan and earn the interest as well.
Also, if you are planning to go for the early withdrawal facility, they should remember that as a penalty for the bank, the depositor will be allowed to pay a certain amount. This is normally between 0.5 and 1% of the whole. Some banks allow you to make an early withdrawal without penalty.
Also avoid withdrawals if your FD is nearing maturity.
You should only withdraw it prematurely if your fund requirements are equal to or greater than the FD amount, and there are still a few years left for the FD maturity.