All you need to know about premature withdrawal from bank FD

5 MinsJan 06, 2023

To maximise the returns on your bank Fixed Deposit (FD), it is recommended that premature withdrawals aren’t made. But given the fact that uncertainty is another name for life, and we may need the money for unknown or known reasons before maturity, many of us consider prematurely encashing our Fixed Deposits.

All you need to know about premature withdrawal from bank FD

But mind you, premature withdrawals hinder the wealth creation process and apply brakes on the power of compounding. Typically, most banks charge a penalty of 0.5% to 1.0% of the interest rate on FD if you prematurely withdraw. So, effectively the rate of return on the FD reduces.

To know how much returns your investment in an Axis Bank FD will earn, use Axis Bank’s FD calculator.

That said, to avoid hindering the compounding process and paying a penalty, a better approach instead would be to avail a Loan Against your FD (in the form of an overdraft). It allows you to continue earning interest on the bank FD (without liquidating it) and get access to funds when you need it the most. All you need is:

By pledging your fixed deposit with the bank, you can get access to 80-85% liquidity of your Fixed Deposit amount. The minimum loan amount, however, is Rs. 25,000.

How much is the rate of interest?

The interest rate for a Loan Against FD is comparatively lower than for personal (unsecured) loans–– to be precise, just 2.0% above the interest rate earned on your bank FD. And the best part is that interest is charged on the actual amount utilised and for the tenure of utilisation. Further, there are no EMIs or post-dated cheques required, which is generally the case with other loans.

How much can the loan tenure be?

There isn’t a loan tenure as such in the case of Loan Against FD. You have the flexibility to repay the loan as long as the bank FD is in force.

Are there any prepayment charges on the preclosure of the Loan Against FD?

Unlike other loans, there are no prepayment charges on preclosure. And once the loan is repaid in full, the fixed deposit––earning you a rate of return –––is released by the bank.

Also Read: [All That You Need to Know About Loan Against Fixed Deposits]

Benefits of availing of a Loan Against FD:

  • Useful means of credit, particularly when you do not have a credit history
  • You pay a lower rate of interest than on a personal loan
  • The interest is charged only on the actual amount utilised and for the tenure of utilisation
  • You have repayment flexibility -- pay at your convenience, no system of EMIs
  • No preclosure charges
  • You do not have to utilise money assigned for other financial goals
  • The path to wealth creation is uninterrupted

Moreover, the application procedure to avail of a Loan Against FD is convenient, hassle-free and involves minimal paperwork as compared to other loans.

With Axis Bank, the application process is digital, instant and simple, thus making it a seamless experience. After you apply online, the bank will follow its process, and in case you have any query, the relationship manager shall provide comprehensive information.

The sanctioning of the loan will be subject to a thorough assessment as per the extant instructions and credit policy of the bank. The availability of margin and security is not a substitute for the due diligence process. Once the loan is sanctioned, your acceptance of the terms and conditions will be obtained on the sanction letter. Note that a copy of the loan agreement along with all the enclosures quoted in the loan agreement will be furnished to you. And the sanction letter will clearly indicate the credit facility extended to you.

The loan will be disbursed to you on compliance with all the terms and conditions. Once the loan is disbursed, if the bank decides to recall the advance/accelerate the payment/accelerate the performance under the loan agreement/or wishes to seek additional security, a notice in this regard shall be issued to you, the borrower. On repayment of the loan in full, the bank shall release all the securities held. And the important point to note is that unless the loan against bank FD is repaid in full, you, the borrower, cannot prematurely close the bank FD.

You can know more about Axis Bank’s Loan Against FD online.

A bank FD is a secure way to generate wealth and add to your financial security. As far as possible, avoid premature withdrawals. While life may stump you with many stroppy moments, make sure you are making prudent decisions and not chopping down the former investments you made to fulfil certain vital financial goals.

Disclaimer: This article has been authored by PersonalFN, a Mumbai-based Financial Planning and Mutual Fund research firm. Axis Bank doesn't influence any views of the author in any way. Axis Bank & PersonalFN shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.