Can I prepay my personal Loan without any extra charges?Personal loans have a flexible repayment method and can be paid at your convenience. There are extra charges or penalty fees incurred if the prepayment is done after six instalments are paid. Borrowers can prepay loans in full or part payment. Borrowers should read the prepayment terms well in advance as mentioned in the loan document.
What are prepayments?Prepayment of personal loans simply refers to repaying the loan either partially or completely before the designated tenure. The early payment can reduce the financial burden of paying EMIs.
Personal loans have a slightly higher interest rate on a fixed basis. Theinterest rate does not vary or fluctuate, unlike secured loans. There are pros and cons to prepaying the personal loan.
Below are some of the advantages and disadvantages of personal loan prepayment.
What are the advantages of making a prepayment?A personal loan generally has a lock-in period of six months to one year after which the entire outstanding amount can be prepaid. If you can afford the early repayment of the loan and clear off the debt, nothing better than this!
Improves credit score - A clean and spotless credit report with timely repayment records is more desirable and lenders feel secure in giving the loan to such borrowers. Foreclosure or prepayment of a personal loan is considered positive and helps to improve your credit score. An increased Credit score will benefit the borrowers to bargain for more beneficial terms for future personal loans.
Minimizes your debt burden - Being debt-free is a dream for many borrowers. It will be ideal if you have surplus funds for foreclosure of a loan. It leads to a stress–free life, gives financial security, reduces the risk of financial failure and reflects zero liabilities.
Save on your interest amount - If you get an opportunity to prepay a part of the personal loan amount before the end of its tenure, it can reduce the overall interest payments. Some institutions may charge a prepayment penalty fee of 1-2.5% for such allowance.
Overall, prepayment or foreclosure of a personal loan often makes financial sense. The sooner you pay it, the more you save on the interest amount.
Disadvantages of personal loan prepaymentNow let’s have a look at some of the disadvantages of paying off a personal loan early:
Lump sum payment - Paying off the personal loan completely at once with a lump sum amount can put the borrowers at risk sometimes. What if an immediate expense arises and the money is paid for foreclosure. This can put borrowers in a financial fix creating a situation of taking another loan.
Reducing monthly budget - Paying a large amount of cash at once may cause disturbance in your monthly expenses. You may have to compromise on other expenses as the major chunk of money is debited for foreclosure, though the burden of a personal loan gets reduced, you should always plan the finances before making the prepayment.
Here are two options for prepayment of a personal loan, which you can choose at your convenience:
- Partial prepayment of personal loan - If your budget does not allow you to prepay your debt completely, opt for partial prepayment of personal loan. However, check the prepayment charges, if any, when making multiple partial prepayments towards a personal loan.
- Full prepayment of personal loan - On the other hand, you can make a complete prepayment if you have adequate finances. You can merely prepay your personal loan in a single instalment. There will be a charge involved with the same.So it’s advised to read the agreement carefully.