Personal Loans are widely used financial product in India; this is in great demand as compared to other types of loans. A personal loan can be used for any needs unlike home loan or vehicle loan, which are very limited in terms of the purposes that they can be availed for. People make use of personal loan for travel, for festival celebrations, for buying gadgets and also for households, for wedding preparations and so on. Though most of take personal loan with the aim to prepay it way before the tenure, many are still doubtful of whether they should make use of this option or not. Well the answer is clear in this article.
While taking loan many will opt for long term loans with low rate of interest, this way the monthly EMI payment will be lower but the rate of interest over the tenure of the loan will be high. In case if you have any surplus fund in your hand, make use of this cash or savings to prepay the outstanding personal loan. Though there are lots of benefits of prepaying the personal, the benefit will be calculated on the basis of the outstanding sum.
Advantages of Prepaying of your Personal Loan
Reduction in Loan Tenure and EMI Amount
Though you have taken up a personal loan of Rs. 3 lakhs with the tenure of 3 years, it is possible to pre-close the loan when you have some extra cash. This way your monthly EMI amount will be reduced and also there will be no requirement to hold the debt commitment for longer period. The faster a loan gets cleared, lesser will be the burden. Though most of the personal loans have one period as the lock period, it is possible to pre-close this after this period.
Make use of the lock period to save enough cash to pre-close the loan. And simultaneously have a plan to invest the EMI amount into some other high returns yielding investment. The lock period on personal loans should be taken much into consideration, always make use of these time frames to plan your finance. There is no ideal right or wrong way. Each person’s income and debt bearing capacity should be considered to decide when to pre-close the loan amount.
No Pre-Payment Charges
It is always good to be debt free, but while making such moves it is equally important to make sure that you are not paying too much towards the pre-closure charges. Check the loan tenure before deciding whether to pre-close or not. For example, if your loan is only for the next 6 months or lesser, it is advisable to not pre-close. And if you are into floating rate of interest then there will be no prepayment charges at all. As per RBI circular, it is mandatory to not charge any pre-closure charges on loan that are on the floating rate of interest basis.
Don’t take any actions by just assumptions, speak to your lender before initiating a request, get to know how the processing is and what all types of charges associated to this pre-closure are. Post calculating these evaluate what is the amount you will save and if it is worth the effort you are spending. Only if the option is worth go head and request for a pre-closing option on your personal loan.
Uptick in Credit Score
Credit score are directly linked to the outstanding debt you have. In case if you pre-close a loan or credit card outstanding, the same will reflect on your credit score. Pre-closing and part payments are all considered as smart ways to raise your credit score. Based on this credit worthiness rating, banks and NBFCs will consider whether to offer loan in future or not. Pre-payment of loan is equal to successful payment of outstanding loan and closing debt. This will throw good feedback on the individual and banks and NBFCs will be happy to offer loan in future any time when there is need.
For example
A person opts for a personal loan for INR. 2 lakh at an interest rate of 15% per annum and the tenure period of the loan is five years. In this case, the monthly EMI for this particular loan is to INR. 4758.
After the first year, the borrower would have paid INR. 29,039 towards the premium and INR. 28,057 as interest.
In case the borrower decides to prepay the full loan amount, he would have to pay INR.57,422 less in the form of interest.
These are some of the advantages of pre-payment of personal. Pre-payment charges are applicable if you choose fixed interest rate and this charge will vary from 3% to 5% based on bank conditions. There are quite a lot of public and private banks as well that do not charge pre-closure fees on fixed interest rate personal loans as well. Thus it is very important to speak to your banks directly to understand bank specific terms and conditions. Analyze all the available information thoroughly and make the wise decision of whether to prepay the outstanding amount on personal loan or not!
Cons of Prepaying your Loan
Prepayment Charges
Prepayment charges/ penalty is the amount that a borrower is charged when he/she repay the loan before the loan tenure which is mentioned in the loan agreement. The prepayment charge varies from lender to lender. Some lenders do not charge prepayment penalty at all. But, you need to check for this before you opt for a particular lender.
The amount charged as the pre-payment fee depends on the outstanding principal amount and remaining tenure too.
Lock-in Period
Most of the lenders have lock-in period, during which one can not pre-pay their loan. Generally, the lock-in period with most of the lenders is 12 months from the day of your loan disbursal. So, even if you have money to per-pay your loan you have to wait for the lock-in period to be over.
Losing a Large Amount of Money at Once
Having money is a blessing itself. It can be used to create funds for your future by investing it, creating some emergency fund or it can be spent on some important thing you need. But pre-paying your loan eats all your savings at once.
(Updated 27-06-2019)
