This Week's Update: Should You Break Your Fixed Deposit to Take a Loan?

If you're using this app, you're already ahead of most people. You're thinking with logic, not emotions. Let's talk about one of the most common financial mistakes people make – breaking a fixed deposit to avoid taking a loan.

Compound Interest vs. Reducing Balance Loans

Investments like fixed deposits, mutual funds, and bonds grow through compound interest. That means you earn interest on the interest you've already earned, every year. Over time, this leads to powerful growth.

Loans, however, work on reducing balance. Each month, your EMI is split between interest and principal. As your loan reduces, the interest portion gets smaller every month. This means the cost of the loan keeps falling over time.

This is why a long-term mutual fund growing at 12 percent can even beat a 30 or 40 percent loan, when you do the math over 20 or 30 years.

The Role of Inflation

Inflation reduces the value of money over time. It affects both your investments and your loan.

Your EMI stays mostly constant, but inflation means the real burden of that EMI keeps falling each year. That 25,000 rupee EMI today may feel like only 15,000 ten years later.

On the flip side, your FD or mutual fund return also loses value when adjusted for inflation. A 12 percent return in a 6 percent inflation world is actually just a 6 percent real return.

That’s why our app always shows the real value of your EMIs and your investments after considering inflation. The truth is hidden there.

Assets vs. Liabilities

Assets are things that go up in value or generate income. Examples include land, flats, and gold.

Liabilities are things that lose value over time, like cars, laptops, and phones.

When you take a loan to buy an asset, like a house, you are using debt to build wealth. If your home loan interest is 8 percent and your FD is giving 6.5 percent, the gap is not very large. Plus, inflation is quietly lowering your EMI each year.

Using a Loan for a Car – Be Careful

Now let’s talk about liabilities. If you want to buy a car for 10 lakh and already have a 10 lakh FD, your first instinct may be to break the FD and buy the car outright.

But if the FD is giving you 7 percent and the car loan is at 10 percent, and the EMI becomes lighter over the years, it might make more sense to keep the FD and take the loan. Let the FD keep growing, and let inflation reduce the real cost of your EMI.

However, do not stretch your budget. If the car is worth 20 lakh and you only have a 10 lakh FD, that extra 10 lakh becomes an uncovered liability. The loan benefits do not apply here unless you have matching funds to keep invested.

Always Let the Numbers Decide

Use the calculator in this app. Let the numbers show you the truth. Not your emotions. Not your gut feeling.

If your investment gives better long-term returns than your loan cost, do not break your investment. If your loan is going toward buying an appreciating asset, it’s probably a smart move. Run the numbers and check.

Conclusion

• Loans can be useful if used wisely, especially for assets like property.
• Fixed deposits and mutual funds should not be broken unless absolutely necessary.
• Inflation reduces your EMI burden over time – use that to your advantage.
• Never stretch your budget for liabilities like cars or electronics.
• Use this app regularly. It will show you the real picture, with the math behind it.

We are constantly adding more calculators and insights to help you make better decisions. Keep checking this page for more updates and tools that show you what others don’t tell you.