Does personal loan prepayment always benefit you?

Nowadays, a personal loan online can be availed in no time being an unsecured loan. Therefore, it is a collateral-free loan that does not require any security or guarantor, unlike a secured loan. Moreover, a personal loan can be used for multiple reasons like the occurrence of a sudden medical emergency, urgent travel, miscellaneous wedding expenses, unavoidable repairs, etc.

 

Although a personal loan can be availed instantly within few minutes, the interest rate levied is slightly higher for being an unsecured loan in character. Therefore, at times borrowers prefer paying off the loan earlier than the due date to help reduce the total interest rate. This is a pre-payment loan procedure that is often initiated to avoid excess payment in the form of interest. So when you decide on a loan prepayment, you need to keep your financial budget planned, which should not be the cause of your financial imbalance.

 

Nevertheless, personal loan prepayment may be a good idea if you have surplus money, but also be aware that it will not always benefit you. Moreover, there are specific pros & cons of early payment levied by financial institutions and NBFCs for the borrowers.

 

Pros of personal loan prepayment

 

Prepayment of personal loan is accepted only after the lock-in period of six months has passed. In some instances, borrowers can fall prey to penalty charges levied by some lenders for loan prepayment.

 

Personal loan prepayment may be a sensible idea if you look for a lender who does not have a set prepayment policy or does not charge heavily on prepayments.

 

Below mentioned are certain benefits of personal loan prepayment:

 

  1. Considerable savings, if the loan prepayment is done immediately within the fixed tenure
  2. Loan tenure reduces as EMIs are restructured based on the remaining amount left after prepayment
  3. Reduces your burden on the interest rate for a prolonged period
  4. Lowers the round of EMIs
  5. Positively effects on your credit score

 

 

Cons of prepayment of a personal loan

 

  1. Some lenders may levy penalties at a flat rate or as an interest for a certain number of months for personal loan prepayment made within the tenure. The penalty may vary from lender to lender.
  2. Making a part loan prepayment may cause financial imbalance, and economic failure may be at risk.

 

  1. Prepayment may require revising the structured EMI cycle

 

  1. Hence, you should prefer paying in installments and use the money for other essential purposes.

 

How to calculate if loan prepayments are worth it?

 

Generally, if the lender does not impose any prepayment charges, you will benefit by repaying your loan early. Before initiating the prepayment, it is better to know how much you will be saving by loan prepayment. You can calculate by adding the total interest for the remaining tenure plus any ongoing fees. The final amount is what you save if you decide to repay your dues before time.

 

For example, you have availed of an instant personal loan of Rs.1,00,000, and you make a part payment of Rs.50,000 after the lock-in period on an interest rate of 15%. In that case, your interest rate and EMI will automatically reduce the outstanding principal amount, making you debt-free at an early stage of the loan. In most cases, no penalty is levied if you make the prepayment after the lock-in period.

 

Effect of loan prepayment on credit score

 

An impeccable credit report with clear loan repayment records is more desired by the lenders and makes the borrower’s credit profile more viable for loan approval. A full or part prepayment of your ongoing personal loan is considered positive as it increases your CIBIL score. A positive CIBIL score will help you to bargain for more favorable terms from the lender.

 

Conclusion

Before implying the option for personal loan prepayment, it is necessary to consider all the factors mentioned above. Only if you are saving with prepayments, go ahead with the option or stick to installments to prevent further financial imbalance.

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