Should I break my FD to close my personal loan?

You have an FD sitting in the bank, perhaps for years, and every month a personal loan EMI goes out of the same account. It feels wrong to break a deposit you worked hard to build. It also feels wrong to keep paying interest while money sits idle.

In most cases, the arithmetic is clear. The harder part is deciding how much to use and what to keep aside, so you do not end up borrowing again the next time something goes wrong.

Why does the FD usually lose this comparison?

A personal loan and an FD are two sides of the same coin. One costs you interest, the other earns you interest. The question is simply which rate is higher.

As of October 2026, FDs at large banks pay around 6 to 6.5 percent a year for general depositors, and FD interest is taxed at your slab rate. Personal loans start from about 10 percent a year at large banks and are often much higher depending on your profile. With rates moving after the RBI raised the repo rate on 7 October 2026, check your own loan and FD rates rather than relying on averages.

So you are typically earning 6 to 6.5 percent (less after tax) while paying 12 to 16 percent or more. Keeping both open means paying the gap every month.

What does that gap cost each month?

The easiest way to see it is interest per month: balance times yearly rate, divided by 12.

Illustration: Two years ago, someone borrowed ₹5 lakh as a personal loan at 14% for five years. The EMI is ₹11,634, and after two years about ₹3.4 lakh is still outstanding with 36 EMIs to go. They also have an FD of ₹5 lakh earning 6.5% a year, and they are in the 30% tax slab. (Illustrative numbers, not a real client; rates are assumptions for the example.)

That gap narrows slightly as the loan balance comes down, but it never turns in favour of the FD while the loan rate is this much higher.

What happens over the remaining three years?

The real benefit shows up when you look at cash flow, not just interest. Compare two paths over the 36 months that remain.

• Keep both: the FD stays and keeps growing. The ₹11,634 EMI keeps going out of salary every month.
• Close the loan: ₹3.4 lakh comes out of the FD and closes the loan. The same ₹11,634 a month now goes into a recurring deposit instead of the EMI.

The monthly outgo from salary is identical in both paths. Only the order changes.

These figures assume 6.5% on both the FD and the recurring deposit, with no premature-withdrawal penalty on the FD. A penalty would trim the benefit slightly but rarely reverses it. The after-tax gap is larger because the "keep both" path earns more taxable interest.

How much of the FD should you actually use?

This is where most people go wrong, in one direction or the other. Breaking the entire FD can leave the family with no cushion, and the next hospital bill or job gap goes on a credit card at a far higher rate.

A sensible order:

1. Keep a buffer first. Leave enough in the FD or bank for at least three months of essential expenses, more if your income is irregular or you are the only earner. Our guide on how big an emergency fund should be helps you size it.
2. Clear the costliest debt next. If there is also a credit card balance, close that before the personal loan; it is usually far more expensive. See clearing credit card debt fast.
3. Then the personal loan, in full if the remaining FD covers it, or as a part-prepayment if your lender allows one.
4. Leave the home loan alone for now. At much lower rates, it is usually the last debt to target.

In the illustration, using ₹3.4 lakh of a ₹5 lakh FD leaves ₹1.6 lakh as a buffer, which may be enough for a smaller household and too little for a larger one.

What should you check before closing the loan?

• Foreclosure charges. For floating-rate personal loans to individuals, RBI rules do not allow prepayment charges on loans sanctioned or renewed from 1 January 2026. Many personal loans are fixed-rate, though, and those can carry a foreclosure charge that must be stated in your sanction letter. Read it, and add any charge to your calculation.
• FD premature withdrawal terms. Banks typically pay a slightly lower rate on early withdrawal. Ask what you will actually receive.
• Paperwork. Ask for a foreclosure statement before you pay, and get a no-dues certificate after. Check that your credit report shows the loan as closed within a couple of months.

What should happen to the freed EMI?

This is the step that makes the whole decision work. The day the loan closes, set up a standing instruction to move the old EMI amount on salary day, into a recurring deposit or back into an FD. Within about three years, as the illustration shows, the FD is rebuilt and larger than before.

If you skip this step, the ₹11,634 quietly becomes spending, and you have simply swapped your savings for a few years of a slightly easier month. Giving idle money a job, and then giving the freed EMI a job, is exactly what we map in a first conversation.

When should you not break the FD?

There are a few cases where keeping the FD is the better order:

• It is your only emergency money, and breaking it would leave nothing for a medical or job emergency.
• The loan has only a few EMIs left, so the interest saved is small.
• The FD is earmarked for a near-term goal, such as fees due in a few months, and you would need to borrow again to meet it.
• The foreclosure charge is high enough to wipe out most of the saving.

Outside these cases, money earning 6.5 percent while you pay 14 percent is usually money without the right job.