This article discusses the consequences of not paying your recurring deposit (RD) and offers ways to avoid defaulting, including setting up auto debit and planning expenses.
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Recurring Deposits (RD) are a popular investment option for individuals who want to save money for a specific goal, such as a down payment for a home, a child’s education or retirement.
The RD scheme offered by banks and financial institutions allows you to save a fixed amount of money every month, for a predetermined period, at a fixed interest rate. But what happens if you stop paying your RD? Let’s explore the consequences of not paying your RD and how to avoid them.
RD Default
If you fail to pay your RD installment on the due date, your account will be considered in default. The bank or financial institution usually allows a grace period of one to two months for you to pay. If you still do not pay within the grace period, the account will be considered a Non-Performing Asset (NPA), and the bank may take legal action against you.
Penalties and Charges
When you default on your RD, the bank or financial institution may impose penalties and charges on you. These can vary depending on the bank or financial institution and the terms of the RD agreement.
Generally, banks charge a penalty of 1% to 2% on the overdue amount for each default month. In addition to the penalty, you may have to pay interest on the overdue amount at a higher rate than the agreed-upon RD interest rate.
Impact on Credit Score
Defaulting on your RD can hurt your credit score. Your credit score is a numerical representation of your creditworthiness and is used by lenders to determine your creditworthiness when you apply for loans or credit cards.
When you default on your RD, the bank or financial institution may report the default to credit bureaus, lowering your credit score. This can make it difficult for you to get approved for loans or credit cards in the future.
Loss of Interest and Benefits
If you stop paying your RD, you will lose out on the interest and benefits you would have earned if you had continued making the payments. This can be a significant loss, especially if you had invested a large amount of money in the RD. (Pinnaclemontessori.com)
Moreover, if you had opted for a tax-saving RD, you would lose out on the tax benefits as well.
Legal Action
If you fail to make the RD payment even after the grace period, the bank or financial institution may take legal action against you. This can include sending you legal notices, hiring a collection agency, or filing a case in court.
Legal action can be time-consuming and expensive, harming your credit score and reputation.
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Ways to Avoid Defaulting on RD
Here are some ways to avoid defaulting on your RD:
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Set Up Auto Debit
Setting up an auto debit instruction with your bank or financial institution is one of the best ways to ensure that your RD payments are made on time. This way, the bank will automatically deduct the instalment amount from your account on the due date, and you will not have to worry about missing a payment.
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Plan Your Expenses
Plan your expenses in advance so that you have enough funds to make the RD payment on the due date. This may require you to make some adjustments to your spending habits, such as cutting down on unnecessary expenses or increasing your income.
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Renew or Close the Account
If you are unable to continue with the RD for any reason, you can choose to renew or close the account. Renewing the account allows you to extend the RD period while closing the account allows you to withdraw the amount and close the account.
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Opt for Partial Withdrawal
If you need some funds urgently, you can opt for a partial withdrawal from your RD account. This will reduce the total amount of the RD and the interest earned, but it will also help you avoid defaulting on the RD.
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Communicate with the Bank
If you are facing financial difficulties and are unable to make the RD payment on time, it is important to communicate with the bank or financial institution. They may be able to offer you a grace period or a restructuring of the RD to make it more affordable for you.
Conclusion
Defaulting on your RD can have serious consequences, including penalties, charges, a negative impact on your credit score, loss of interest and benefits, and legal action. However, there are ways to avoid defaulting on your RD, such as setting up auto debit, planning your expenses, renewing or closing the account, opting for partial withdrawal, and communicating with the bank.
It is important to be proactive and responsible with your finances to ensure that you achieve your financial goals and avoid financial difficulties in the future.
Vakisearch’s RD calculator can help individuals to calculate the maturity amount they will receive at the end of the investment period. The calculator considers the monthly deposit amount, the investment duration, and the interest rate offered by the bank or financial institution. By providing these details, the RD calculator can calculate the total amount that will be earned as interest and the maturity amount.
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