Personal Loan Prepayment

One of the most crucial areas that all borrowers should consider before availing a personal loan is prepayment.

"Prepayment is an option provided by financial institutions allowing customers to pay their loan prior to the expiry of the loan’s due date."

Personal Loan Pre-payment charges of top financial lenders

For instance, if a customer decides on availing a loan from ‘X’ Bank for five years with the rate of interest set at 15%, and the customer’s income suddenly rises during the third year of the loan, thus enabling him/her to complete making repayments well in advance of the due date, the customer can opt to repay the whole amount by the end of the third year. The terms and conditions of the loan will determine the manner in which the customer can do so.

Benefits of Personal Loan Prepayment

1. Go debt-free faster: You have taken a loan to take care of some essential expenses, and now it’s time to repay it. However, if not managed prudently, your personal loan can very well cause great financial distress. Personal loan EMIs also take away a chunk of your monthly savings. This is why it is often recommended to prepay your personal loan fully if you have any extra income coming your way. When you prepay your loan, you may have to pay a prepayment fee, which is typically nominal. However considering the fact that prepayment can help you be free of debt well before the end of the loan repayment tenure, the prepayment fee is definitely a small price to pay in that regard. Not to forget, you will no longer have to stress about loan EMIs eating into your savings.
2. Prepayment means reduced interest outflow: When it comes to loan prepayment, one of the most important aspects to consider is the lock-in period. This refers to the period during which the lender does not allow the borrower to make any prepayments, full or partial, towards the loan amount. However, once the lock-in period is over, and you are in possession of some extra income, try prepaying your loan, fully or even partially. What this will do is save you a considerable amount of interest that would be applicable on your borrowed loan amount. Don’t forget the prepayment fee that accompanies loan prepayments, which would still be a bargain to pay, considering the loan interest amount you’d be saved from paying.
3. Partial Prepayments Can Lower Your Debts: In tune with the above-mentioned points, here we talk about partial prepayment on a personal loan. What it can do is really quite simple – lower your debt burden. When you partially prepay your outstanding loan amount, you lower your debt burden. What this also does is lower the amount of interest you pay that is chargeable on the total outstanding amount. However, if you wish to prepay your loan amount, try doing it during the early years of the loan tenure.
4. Improve Your Credit Score : When you prepay your loan, fully or partially, you are wiping out or lowering your debt burden in one shot. What this does is improve your credit score as outstanding loans are directly linked to your credit score. When the outstanding loan amount is reduced or completely paid off, with partial or full prepayment, your credit score also automatically goes up, thereby improving your chances of getting another loan.

Is it better to make Prepayments on the Personal Loan you avail?

The cost of lending is always lower in comparison with a customer’s cost of borrowing. For instance, a customer can avail a loan at 15% interest, but the savings made per annum will be no more than 9% to 10%. At the same time, the customer will have to pay 15% interest on the pending loan amount. Should the customer make use of the option to prepay, the loan amount can be repaid instantly, thus saving an extra 5% to 6% on interest per annum.

Prepayment fees charged by banks

The amount of money spent by a bank to borrow funds is lower in comparison with its lending price. After lending the money, the bank earns the difference in the amount for as long as the loan runs. Should the customer opt for prepayment, the rate of interest that the bank would otherwise earn over the extra period decreases. Prepayment fees are charged by some banks to make up for the loss of potential income.

The prepayment fees charged by banks vary considerably among banks. There may be multiple restrictions depending upon which bank a customer borrows from, but generally, the rate of interest is between 4% and 5% on the outstanding loan amount. Moreover, prepayment fees can also differ depending upon the completed loan tenure. While zero prepayment fees may be offered by some banks after three years, some others provide discounted rates following a certain time period.

How do customers deal with Prepayment charges on their Personal loans?

Customers are advised against going for packages that provide low prepayment fees. The first thing to do would be to compare the interest rates against prepayment charges. If the prepayment fees are low but the rate of interest is high then it is advised that you choose the one with lower interest. The prepayment calculator can be used to monetize the advantages you could potentially receive from low prepayment charges. The probability of prepaying the loan amount must also be assessed as prepayments are largely determined by the financial standing of a customer. If the customer is expecting a considerable rise in income then prepayment fees must be considered, if not, packages with low rates of interest may be the best option for you.