Before You Break That Fixed Deposit — Have You Considered Borrowing Instead?

When investors need quick liquidity, the instinctive move is often to break a fixed deposit. But that decision can quietly erode long-term returns through penalties, lost interest, and disrupted compounding. With banks increasingly offering loans against fixed deposits (FDs), a more efficient alternative is gaining ground — borrowing instead of breaking the deposit.

According to Nikhil Kothari, Director at Etica Wealth Private Limited, the right choice depends entirely on the purpose of the cash requirement. "The first question investors need to ask is whether the money is needed temporarily or permanently," he says.

If an FD was created for a long-term goal, such as a home down payment, education fees, or a planned expense, and that goal has arrived, breaking the deposit is reasonable. "In such cases, there’s no point carrying debt," Kothari notes. "The money was invested for this purpose."

The problem arises when long-term savings are liquidated for short-term needs like delayed salaries, temporary business expenses, or bridge funding for a few weeks or months. "Breaking an FD in such cases interrupts compounding and often attracts premature withdrawal penalties," he says.

Most banks allow investors to borrow between 75% and 90% of the FD’s value. Interest rates are typically 1–2 percentage points higher than the FD rate. This makes them significantly cheaper than personal loans or credit cards. Importantly, the FD continues to earn interest even while it is pledged.

"If an FD earns 6.5% and the loan costs 8%, you’re effectively paying a small spread to keep your long-term savings intact," Kothari explains.

Premature FD withdrawals usually involve a penalty of 0.5–1% and the loss of higher interest associated with longer tenures. Investors may also face reinvestment risk if interest rates fall.

By contrast, loans against FDs involve no breakage penalty, continued interest accrual on the deposit, and interest costs only for the period the loan is outstanding. "For liquidity needs of one to six months, borrowing often works out cheaper than breaking the FD," Kothari says.

Unlike loans against market-linked securities, loans against FDs carry minimal volatility risk since the underlying asset has a fixed value. However, investors still need to read the fine print. "Check how interest is calculated—monthly or quarterly—and whether unpaid interest compounds," Kothari cautions. "Also look at the loan-to-value ratio and the conditions under which the bank can liquidate the FD."

Easy access to credit can also encourage misuse. Kothari warns against using loans against FDs for lifestyle or discretionary spending.