Personal loans have become a popular financing option, especially in the event of an urgent or unexpected expense that often arises when you least expect it. The major benefits like processing these unsecured loans is fast as they can be done with minimum paperwork in favor of personal loans in India.
The fact that personal loans can also be availed without giving collateral or collateral to the lender and interest rates on personal loans are lower than credit cards is why we see most individuals opting for personal loans to meet their needs. expenses or tide over a cash crisis, have made them very popular.
Even with the adoption of personal loans, borrowers will still be looking for options to reduce or consolidate their debt. Today, most banks offer loan prepayment options where borrowers have the option to prepay the loan in whole or in part, before the full term of the loan. Let’s take a closer look at what prepayment of a personal loan is and what are its main advantages.
What is loan prepayment and how does it work?
The prepayment of the loan is one of the most crucial aspects that you need to consider if you are considering availing a personal loan.
Most financial institutions today offer borrowers the loan prepayment facility, where they are allowed to repay their loan before the loan maturity date expires. In other words, prepayment of a loan refers to the payment of the outstanding balance of the loan, in part or in full, before the maturity of the loan.
The borrower can choose to repay more than the monthly payment or the total loan amount in full, before the end of the loan term. That said, paying off a loan in full would result in foreclosure of the loan.
Paying off a loan early can not only reduce your debt, but also help you save money that you would otherwise pay in interest. That’s not all, there are multiple benefits you can gain as a borrower when you repay your loan early. Let’s review the main advantages of prepaying a personal loan.
The advantages of prepayment of the personal loan
Prepaying your personal loan before the end of a loan term is a good decision. Here are some of the major benefits that you can gain by opting for loan prepayment.
Free yourself from your debts
When you take out a personal loan to meet your growing financial needs, you also need to make sure that you are prudent in paying it back. Failure to do so will result in great financial distress. Paying off your personal loan early will help reduce the financial burden of loan repayment or, even better, allow you to become completely debt free.
As personal loan EMIs often cost you a portion of your monthly savings, it is recommended that you prepay your personal loan as soon as possible to save on interest payments. This, in turn, will ensure you have more disposable income in your hands, lead a stress-free life, and achieve financial independence sooner rather than later.
Improve credit score
When you pay off your loan early, you eliminate your financial burden, which also has a positive impact on your credit score. As outstanding loans are tied to your credit score, prepaying personal loans, whether partial or full, will automatically increase your credit score. Alternatively, it will increase your chances of qualifying for another loan. An impeccable credit report, a credit score above 750 and a good loan repayment record are what will close your next loan application and even give you the opportunity to negotiate favorable terms with the lender.
Save on interest amount
Prepayment of personal loans helps you save big on the amount of interest expense. When you prepay your personal loan, you must pay a nominal prepayment charge. This prepayment charge is comparatively a small price to pay for the amount you will save on interest expenses when you choose to close the loan account before maturity.
With no obligation to pay monthly interest on the personal loan, you can save this money or even consider investing in fixed deposit schemes or mutual funds, depending on your convenience.
Reduce your debt burden
Due to financial constraints, you may not be able to prepay the entire loan amount at once. In such cases, if you have received an additional source of income or earned a bonus, then you may consider opting for a partial prepayment of the personal loan. Although partial prepayment will not completely free you from debt, it does help reduce your debt burden. Partial prepayment will also reduce the amount of interest you have to pay on the total outstanding loan amount. If you plan to prepay your personal loan amount, it is recommended that you do so during the first few years of your loan term.
Personal loan prepayment charge
As mentioned earlier, most banks and non-bank financial companies (NBFCs) charge a nominal fee when borrowers choose to prepay their loan amount.
Why are prepayment fees charged?
The amount spent by the bank to borrow funds is less compared to the cost incurred for the loan. After lending the amount, the bank will collect the difference in amount as profit for as long as the loan lasts.
In a scenario where the borrowers plan to prepay the loan amount before the due date, the bank loses the interest rate they would otherwise have earned, had the borrower continued to repay the loan for the entire term. term of the loan.
To compensate for the loss of this potential income, most financial institutions charge a commission to the borrower who opts for the prepayment of the personal loan.
Prepayment charges vary from bank to bank and also depend on the term of the personal loan. In most cases, banks charge an interest rate that ranges from 4% to 5% of the outstanding loan amount. After three years, some banks choose not to charge any prepayment fees, while others offer a discount on prepayment fees after a stipulated period of time.
How can you prepay the amount of a personal loan?
Personal loans sanctioned by banks and NBFCs have different lock-up periods, determined by the lenders. The lock-in period is a key factor you need to consider before applying for a personal loan. The lock-in period is the period during which borrowers are not allowed to prepay their personal loans in whole or in part. This blocking period can range from six months to 1 year, or even more in certain cases. Today we see many lenders relaxing their standards and allowing personal loans to be sanctioned without any lock-up period.
Before you start prepaying your loan amount, you need to plan well and calculate the actual profit you will receive. The benefit of prepaying a personal loan depends on the prepayment fee, the outstanding loan amount, and the remaining term of the loan.
By using an online calculator, you can confirm the amount that needs to be paid and the interest that you are required to pay. If the amount of interest spent is more than the prepayment charge, your best option would be to prepay the personal loan.
To repay your dues before the end of the loan term, you must follow the steps below:
- Contact the bank or NBFC you received the loan from
- Submit Personal Loan Prepayment Check
- This will then be verified by bank officials before proceeding to close the loan account
- Once you have opted for the prepayment of the personal loan, make sure to gather the documents such as the CNP
Personal loans should not be seen as an extension of your salary and they should only be used to overcome a crisis. Repaying your personal loan early has undeniable advantages such as interest savings. Although prepaying loans gets you in the good books of the credit bureaus, you should be aware of the prepayment penalty fees charged by banks and NBFCs.
It is important to consider all the factors mentioned above before proceeding to prepay your personal loan amount. Be sure to calculate your prepayment savings and make sure you benefit significantly from closing your loan account.
It is important to remember that the rules and regulations for prepaying a personal loan vary from bank to bank. Be sure to check with your bank what guidelines are in place before taking a step forward.