Break an FD or Borrow Against It? Advisers Weigh the Costs

Alok Kashyap, executive director and head of liabilities product at DBS Bank India, made a similar case for overdraft facilities against FDs. "To address unforeseen liquidity needs without compromising these foundational investments, DBS Bank India offers overdraft facilities against fixed deposits," he said. The deposit stays untouched and continues to earn the contracted rate, while the borrower pays interest only on the amount drawn. Kashyap said premature withdrawal leads to a reduced interest payout compared with the agreed rate, making the overdraft the more advantageous option.

Both advisers agreed that the economics flip when the borrowing period stretches out. If the interest paid on a personal loan or overdraft over 12 to 18 months exceeds the penalty and forgone interest from breaking the FD, then cashing the deposit early is the cheaper route.

The choice, both advisers said, hinges on the time horizon and the total cost. A short-term gap calls for a loan against the FD. A longer commitment – a year or more – may make the penalty the better deal.