What are the Benefits of Personal Loan Prepayment? Forbes Advisor INDIA – Forbes

Personal loans have become a popular financing option, especially in the case of an emergency or unforeseen expense that often strikes when you least expect it. Key benefits such as processing of these unsecured loans being quick as it can be done with minimal paperwork work in the favour of personal loans in India.

The fact that personal loans can also be availed of without pledging any collateral or security to the lender and the interest rates on personal loans are lower when compared to those on credit cards, which is why we see most individuals opt for personal loans to meet their expenses or tide over a cash crunch, have made them quite popular.

Even with uptake in personal loans, borrowers will always be on the lookout for options to reduce or consolidate their debt. Today, most banks offer loan prepayment options where borrowers are given the opportunity to prepay the loan in full or in part, before the full tenure of the loan. Lets take a closer look at what prepayment of a personal loan is all about and what are its primary benefits.

Loan prepayment is one of the most crucial aspects that you must consider if you plan on availing a personal loan.

Most financial institutions today offer borrowers the loan prepayment facility, where they are allowed to pay their loan prior to the expiry of the loan due date. In other words, loan prepayment refers to the payment of the outstanding loan balance either in part or in full before the maturity of the loan.

The borrower can choose to repay an amount greater than the monthly installment or the entire loan amount in full, before the end of the loan tenure. That said, the full repayment of a loan would result in a loan foreclosure.

Loan prepayment can not only reduce your debt but also helps you save on money that you would be otherwise paying as interest. Thats not all, there are multiple benefits that you stand to gain as a borrower when you prepay your loan. Lets run by the key benefits of prepayment of a personal loan.

Prepaying your personal loan before the end of a loan tenure is a good decision. Here are some of the key benefits that you stand to gain by opting for loan prepayment.

When you take a personal loan to meet your rising financial needs, you also need to ensure that you are prudent to repay it. Failing to do so, will result in great financial distress. Prepaying your personal loan will help you bring down the financial burden of repaying loans or better yet, it allows you to go completely debt-free.

As personal loan EMIs often cost you a chunk of your monthly savings, it is recommended to prepay your personal loan as early as possible to save up on the interest payments. This, in turn, will ensure that you have more disposable income in your hands, lead a stress-free life and sooner than later attain financial independence.

When you prepay your loan, you are wiping out your financial burden which also has a positive impact on your credit score. As outstanding loans are linked to your credit score, prepayment of personal loans whether partially or in full will automatically result in your credit score going up. Alternatively, this will increase your chances of availing of another loan. A spotless credit report, a credit score above 750, and a clean record of loan repayment are what will close your next loan application and even give you the opportunity to negotiate favourable terms with the lender.

Prepayment of personal loans helps you to save big on the interest outgo amount. When you prepay your personal loan, you have to pay a nominal prepayment fee. This prepayment fee is comparatively a small price to pay for the amount you will save on the interest outgo when you choose to close the loan account before maturity.

With no more obligations to pay monthly interest on the personal loan, you can save this money or even consider investing in fixed deposit schemes or mutual funds, as per your convenience.

Owing to financial constraints, it may not be possible for you to prepay the entire loan amount in one go. In such cases, if you have received any additional source of income or earned a bonus, then you can consider opting for a partial prepayment of the personal loan. While partial prepayment may not allow you to go completely debt-free, it helps you lower your debt burden. Partial prepayment will also reduce the amount of interest that you need to pay on the total outstanding loan amount. If you have plans to prepay your personal loan amount, then doing it in the early years of your loan tenure is recommended.

As mentioned earlier, most banks and non-banking financial companies (NBFCs) charge a nominal fee when borrowers opt to prepay their outstanding loan amount.

Why is a prepayment fee charged?

The amount spent by the bank to borrow funds is lower when compared to the cost incurred for lending. After lending the amount, the bank will earn the difference in the amount as profit for as long as the loan runs.

In a scenario where the borrowers plan to prepay the loan amount prior to the maturity date, the bank loses out on the rate of interest that they would have otherwise earned, had the borrower continued to repay the loan throughout the loan tenure.

To make up for the loss of this potential income, most financial institutions charge a fee to the borrower on opting for prepayment of the personal loan.

The prepayment fees will vary from one bank to the other and is also dependent on the completed tenure of the personal loan. In most cases, banks charge a rate of interest that ranges from 4% to 5% of the outstanding loan amount. After the completion of three years, some banks choose not to charge any prepayment fee, while some others offer a discount on the prepayment fees on completing a stipulated time period.

The personal loans sanctioned by banks and NBFCs have different lock-in periods as determined by the lenders. The lock-in period is a key factor that you need to consider before applying for a personal loan. The lock-in period is the time during which borrowers are not allowed to prepay their personal loans in full or partially. This lock-in period could range from anywhere between six months to 1 year or even more in some cases. Today, we see many lenders relaxing their norms and allowing personal loans to be sanctioned without any lock-in period.

Before you set out to prepay your loan amount, you need to plan well and calculate the actual benefit that you will receive. The benefit from personal loan prepayment is dependent on the prepayment charges, the outstanding loan amount, and the remaining tenure of the loan.

Upon using an online calculator, you can confirm the amount that needs to be paid and the interest outgo that you are liable to honour. If the interest outgo amount is higher than the prepayment fees, then your best option would be to proceed with the prepayment of the personal loan.

To repay your dues before the end of the loan tenure, you need to follow the below steps:

Personal loans should not be considered as an extension to your paycheck and they should be availed of only to tide over a crisis. Prepaying your personal loan has some clear-cut advantages such as interest savings. While prepayment of loans will bring you into the good books of the credit bureaus, you need to be mindful of the prepayment penalty fee that is charged by banks and NBFCs.

It is important to take into consideration all the factors mentioned above before proceeding to prepay your personal loan amount. Be sure to calculate your savings from the prepayment and ensure that you are benefitting significantly from closing your loan account.

It is important to remember the rules and regulations when it comes to prepayment of a personal loan vary from bank to bank. Ensure that you check with your bank on the guidelines in place, before taking a step forward.

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What are the Benefits of Personal Loan Prepayment? Forbes Advisor INDIA - Forbes