A
fixed deposit is a safe option to park money. Despite that,
sometimes, you may want to break an FD before its maturity. Is that a
good idea? Can that create loss and upset your budget in any way? Let
us understand the FD process and discuss these issues here.
So
Why Liquidate FD?:
Before
making a choice, getting the calculate the right is
essential. Understanding the FD process and underlying
conditions of the financial institution is also important.
Some
common motivations are:
-
Financial situation is not comfortable, liquidity is an issue, so break FD.
-
Check your cash outflow and inflow. So, prepay loans by foreclosing FD.
-
Switch over to better FD rates.
-
Distress and TINA (There is no other alternative)
Without
bias, let us discuss it with a scenario. Let’s get the FD
calculator handy.
For
Example:
Ramesh
is looking for buy a dream car loan of INR 200000/- His
brother insists on cashing one of the old fixed
deposit done
4 years back. The FD principal was INR 150000/- and the rate was 9.5%
with 5 years tuner. Ramesh had two option getting a loan from
trusted financial. Go by his father advice.
A
quick check revealed that he would pay INR 17500 as EMI for a
12-month loan @ 9.1%. Overall, INR 10000 was the interest outgo plus
and some 800 for loan processing. Total cash outflow was thus INR
10800.
Whereas
his existing FD in current 4th year would have fetched him INR 68370
as compounded interest. The catch! We must compare the opportunity
cost. Had Ramesh kept the money for the 5th year (the year of its
maturity), his FD would fetch him an interest of INR 89866. This is a
net inflow of INR 21496 as interest due to the compounding effect.
This is more than INR 10800, the interest on a loan.
Even
a short time is to be carefully evaluated. An FD of INR 100000
fetches an interest of INR 8296 at 8.05% rate and, if kept for 2nd
year, would bring INR 17281. Compared, the loan rate, @ 17% reducing,
the EMI for a year would have total interest outflow of INR 9440. So,
breaking an FD just for a loss INR 450. Is it worth it?
Concussion: You
can calculate the all risk then take right decisions.
Read here: What is Cumulative FD vs Non-Cumulative FD
Read here: What is Cumulative FD vs Non-Cumulative FD
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