Breaking a Term Deposit (How to Do It with Care)

Term deposits are a secure and low-risk investment option, but life can throw unexpected curveballs that may require you to break your term deposit prematurely. In this FinPlan article, we’ll guide you through the process of breaking a term deposit, explain the potential consequences, and offer alternatives to minimize financial losses.

Understanding Term Deposits and Their Terms

A term deposit is a fixed-term investment that offers a guaranteed interest rate for a specific period, ranging from a few months to several years. Breaking a term deposit means withdrawing your funds before the agreed-upon maturity date. To do this with care, consider the following steps:

1. Review Your Term Deposit Agreement:

  • How to: Retrieve your term deposit agreement or contact your financial institution to understand the terms and conditions of your deposit. This includes the interest rate, maturity date, and any penalties for early withdrawal.

2. Assess the Consequences:

  • How to: Examine the potential penalties and consequences of breaking your term deposit. Typically, these consequences may include losing part of the interest earned or, in some cases, the entire interest amount.

3. Contact Your Financial Institution:

  • How to: Get in touch with your bank or credit union to discuss your situation and the possibility of breaking the term deposit. They can provide you with a clear understanding of the process and the financial implications.

4. Evaluate Alternatives:

  • How to: Explore alternative ways to access the funds you need without breaking the term deposit. This may include personal loans, lines of credit, or using other available savings. Compare the costs and benefits of each option to determine the most cost-effective solution.

5. Negotiate with Your Financial Institution:

  • How to: If you decide to proceed with breaking the term deposit, negotiate with your financial institution to minimize the penalties. Explain your circumstances and inquire about any flexibility they can offer.

6. Plan for the Future:

  • How to: After breaking the term deposit, take steps to rebuild your savings or reinvest the funds wisely. Ensure that you have a financial plan to continue working towards your financial goals.

Consequences of Breaking a Term Deposit

When you break a term deposit prematurely, there are potential consequences to consider:

  1. Penalties: Financial institutions typically impose penalties that can significantly reduce your interest earnings. These penalties can be a flat fee or a percentage of the interest accrued.
  2. Lost Interest: By breaking the term deposit early, you may lose a portion or the entirety of the interest you would have earned if you had waited until maturity.
  3. Reduced Returns: Your financial goals may be impacted if you don’t achieve the anticipated returns on your investment.

Alternatives to Breaking a Term Deposit

To minimize the financial impact of breaking a term deposit, consider these alternatives:

1. Personal Loan: If you need funds for a specific purpose, like a home renovation or medical expenses, a personal loan may be a cost-effective way to access money without breaking your term deposit.

2. Line of Credit: If you have a line of credit or home equity line of credit, you can tap into this source for necessary expenses without affecting your term deposit.

3. Emergency Fund: It’s always a good idea to maintain an emergency fund for unexpected expenses, so you don’t have to break long-term investments.

4. Reinvest: If you can wait, consider reinvesting the funds in another term deposit with a shorter maturity date to access the money in the near future.

5. Negotiate: Talk to your financial institution about potentially reducing the penalties, especially if you have a strong, long-term relationship with them.

Remember, breaking a term deposit should be a last resort. Always explore alternatives first and consult with financial advisors if necessary. By planning ahead and considering your financial options, you can mitigate the financial impact of breaking your term deposit and maintain your progress towards your financial goals.