Taking a Loan Against Fixed Deposit – Is it a Good Idea?

Putting your hard earned money into fixed deposits is often a path that many choose to secure their financial situation for the future with. However, when you look into the dynamics of a fixed deposit account, it is money that has no use for the immediate future as it is locked up for years on end. It is just sleeping money. There are circumstances in life that compel us to take financial assistance whether we like it or not. Personal emergencies do not knock our doorstep before appearing. If we cannot handle such emergencies on our own with some emergency savings we have stashed in a hidden place, there is no choice but to take a loan. Some of us even contemplating breaking our fixed deposit accounts to manage our finances. However, have you considered taking a loan against a Fixed Deposit?

Should you take a Loan against your Fixed Deposit or Break your Fixed Deposit?

When you break your fixed deposit earlier than the maturity date, you will be imposed a penalty. What is even trickier here is that the penalty fee may be between 1% and 2% higher than the interest rate on fixed deposit that you have been receiving. Depending on the amount that you have saved in your deposit, early termination of your account can prove to be an expensive affair.

Another aspect you need to consider when deciding if you should terminate you fixed deposit account to meet your short term needs is that when the bank liquidates your deposit amount, the interest you receive on the amount, more often than not will be for the actual period the deposit account has been kept and at the least interest rate. The bank may not consider the higher interest rate you were originally offered when you had opened the account.

Therefore now you are faced with the dilemma of whether you should break your fixed deposit, pay the penalty and settle for a lesser interest rate on the amount you had earlier deposited or should you take a loan. Depending on your needs and circumstances, you need to evaluate which is the better option for you.

Taking a Loan against your Fixed Deposit as a Collateral

Taking a loan against some form of collateral is always cheaper than taking one with no collateral simply because the risk of defaulting is minimized and the bank has some consolation of recovering the debt. Loans with a collateral are even cheaper than taking a personal loan.

Now that you have a fixed deposit that you have no intention of using for a while, why not use the deposit as your collateral and take a loan against it at a lower interest rate? Not only will it work out cheaper for you interest wise, you also don’t have to lose your savings in the process. It is as if you are borrowing from yourself and repaying back the amount. As this is a short term financial crisis that you are faced with at the moment, once you have handled it, you can then work towards your savings again without losing a single dollar.

Sebastian Taylor is a young and dynamic digital marketing professional with years of experience in content writing he is currently working with in a startup Fin-tech head quarters in Singapore branch.