Pros and Cons of Personal Loan Prepayment
Loans are repaid in the form of equated monthly installments(EMI). These installments are deducted from an individual’s bank account on a suitable date as pre-decided by the lender and the borrower. EMIs are paid throughout the tenure of the loan, which can range between 6 to 60 months.
However, there may come a day when borrowers experience a huge windfall. With these additional funds, they may wish to close their existing loan before the end of the tenure. Closure a loan before the completion of the tenure is known as prepayment of a personal loan. The borrower has the option to either close the loan partially or completely.
If you find yourself in such a situation, ask yourself the pros and cons of loan prepayment before making the decision.
What is a prepayment penalty?
While availing a personal loan of any kind including a travel or shopping, borrowers are informed about the charges applicable. Other than the personal loan interest rate on the loan itself, certain charges are applicable on the loan.
A prepayment penalty is one of them. A personal loan foreclosure charge is known as a prepayment penalty. It is a fee that is levied by the lender if borrowers wish to foreclose their loan partially or during a given time frame.
How does a prepayment penalty work?
If you are choosing to foreclose your personal loan, it is important to know how loan prepayment works.
Lenders typically charge a pre-decided percentage as a penalty charge. Loans can only be foreclosed after a lock-in period. Some lenders have 1 year as a lock-in period whereas others like Finnable have a lock-in period of 6 months.
This means that prepayment of your personal loan is possible only after 6 months of availing the loan. Additionally, prepayment charges on the personal loan are only applicable after 6 months and the penalty is on the balance amount and not the entire principal amount.
At Finnable, prepayment charges applicable is as under:
within 6 months – 6.5%
After 6 months, a penalty of 4.5% is levied.
Between 6 to 12 months, it is 4%
And 3.5% between 12 to 24 months
For prepayment done between 24-36 month 3% penalty is levied.
Pros of prepayment
If you find yourself in a position that requires you to foreclose your personal loan, you need to know the pros of doing so:
- Full foreclosure: Most NBFCs have a certain lock-in period, before which a loan cannot be foreclosed. If you experience a windfall and wish to foreclose your loan in full, consider doing it in the early stages. You will save on the interest to be paid.
- Partial foreclosure: Consider this, if you have idle money in your savings but enough to foreclose your loan in full, you can still partially foreclose your loan account. Though you may have paid a considerable amount as EMI and interest, the savings on the partial closure of the loan will still be higher than the interest amount paid.
- Increase in credit ratings: An individual’s credit ratings are a mix of their financial history. One of the benefits of loan prepayment can be seen in the change in the credit ratings of the individual. This increase is not witnessed immediately and can be seen if the loan prepayment has been done in full.
- Become debt-Free: A loan is a debt that an individual owes to a financial lender. One of the biggest benefits of loan prepayment is that the individual is free of debt before the closure of the loan tenure and will be free from making EMI payments.
Cons of prepayment
- Foreclosure charges: There are ample benefits of personal loan foreclosure. However, one aspect that needs to be kept in mind is personal loan foreclosure charges. While some secured loans do not attract prepayment charges, borrowers may need to pay prepayment charges on personal loans. Personal loan foreclosure charges can range anywhere between 3% to 6% depending on when the loan is foreclosed and the lenders’ terms and conditions.
- Depletion of a large number of funds: Having liquid funds in hand gives individuals the option of using it as they choose to. This can be used for immediate expenses or be used to invest for future gains. Dispensing the additional funds for foreclosure of a personal loan would mean that the individual would be exhausting the cash in hand and will not have the option to spend it otherwise.
Consider the options carefully before deciding on loan prepayment
At first glance, it seems like the pros outweigh the cons when it comes to loan prepayment, However, before deciding to go ahead with the loan prepayment, it is imperative to check when the prepayment on the personal loan can be done to save on the interest. However, if the prepayment means minimal savings on interest, it would not seem like a viable option.
Choose a personal loan lender like Finnable that provides loans for travel, shopping, wedding, etc. at attractive and feasible interest rates of personal loan. Also ensure that you check with them on the personal loan preclosure charges before availing the loan.
You can use their online loan app to know more details of the types of personal loans they disburse, and their personal loan interest rates. You may also use their online personal loan EMI calculator to find out how much EMI you will have to pay on your loan.
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