Sometimes, we suddenly need more money, whether due to a medical emergency or a wedding. In such situations, many people choose to break their FD (Fixed Deposit).
The question arises: is breaking an FD the right option? What are its advantages and disadvantages? Let us answer these questions. Throughout this article, we will not only provide the answers but also share insights from specialists on the matter.
What is an FD?
An FD, or Fixed Deposit, is one of the safest investment options. Many people invest their hard-earned money in FDs at banks, post offices, or other financial institutions. In an FD, you earn fixed interest over a specific period, such as 1, 3, or 5 years. The longer the investment period, the higher the returns.
Benefits of Breaking an FD
Breaking an FD gives you instant cash, which can be helpful in an emergency. If your credit score is low, breaking an FD might be a good option, as getting a loan may be difficult or come with a higher interest rate. Even if you get a loan, the interest rate may be higher than the return on your FD.
Here are 5 advantages of breaking an FD:
- Instant Cash Access: Breaking an FD gives you quick access to cash, which can be useful during emergencies like medical situations or urgent financial needs.
- No Loan Requirement: If your credit score is low and you can’t get a loan, breaking an FD can help you get the money you need without relying on a loan.
- Avoid High-Interest Loans: If you are unable to get a loan or face high interest rates due to a low credit score, breaking an FD could be a better option compared to borrowing at high rates.
- Flexibility in Financial Needs: Breaking the FD allows you to adjust your funds based on your current financial needs, especially if you did not anticipate an emergency.
- Tax Benefit Loss Risk: While breaking an FD before maturity may cause you to lose certain tax benefits, it may sometimes outweigh the need for urgent cash, especially if no other option is available.
Disadvantages of Breaking an FD
Breaking an FD can reduce the amount you invested, affecting your returns. If you were getting tax benefits from the FD, you may lose them. Breaking your FD can also change your investment plans and make it harder to achieve your financial goals.
Here are 5 disadvantages of breaking an FD:
- Loss of Interest: When you break an FD before its maturity, you may lose the accumulated interest or receive a lower interest rate than originally promised.
- Penalties: Many banks charge a penalty for breaking an FD before maturity, which can further reduce the return on your investment.
- Tax Benefits Loss: If your FD offers tax benefits (such as under Section 80C), breaking it early may result in losing those advantages.
- Reduced Investment Amount: Breaking an FD reduces the amount you invested, which can affect your long-term financial goals and plans.
- Disrupts Investment Plans: Breaking an FD can disrupt your planned savings and investment strategy, making it harder to achieve your future financial goals.
Other Options Instead of Breaking an FD
- Invest in Liquid Funds: These provide quick access to cash in an emergency.
- Deposit Money in Your Savings Account: This gives you immediate access to cash.
- Apply for a Personal Loan: If you need more money, this is an option.
- Use a Credit Card: If you need a smaller amount, a credit card can help.
Breaking an FD can sometimes be a good option, but it’s not always the best choice. Make sure to assess your financial goals and needs before breaking an FD and consider other options available.