Personal Loans are the most popular financial product, whether for travel, festival celebration, gadget purchases, or wedding. They are dependable, adaptable, and easy to obtain, requiring no security. Despite its ease, it is also one of the most expensive.
Many borrowers consider prepaying or foreclosing their existing Personal Loans due to the high-interest costs and EMI burden associated with them. While Personal Loan prepayment is usually a good idea for borrowers, they should do a thorough cost-benefit analysis to guarantee a sound decision.
How can you maximize a Personal Loan's benefits while lowering its cost? The answer is prepayment. In this blog, we will discuss how prepayment of Personal Loans works.
Prepayment is when you pay off your outstanding loan amount in whole or part before the loan’s due date. The prepayment clause specifies that if you pay off your loan before the agreed-upon term, the lender will charge you a fee equal to a percentage of the total loan amount, i.e., foreclosure charges on the Personal Loan. The prepayment charges on Personal Loans vary from lender to lender.
A Personal Loan typically has a one-year lock-in term, after which you can prepay the entire balance, saving a significant amount on interest. However, you will still pay interest if you pay in advance. The rates may differ from one lender to another, ranging from 3% to 5%. You might be surprised to uncover public or private lenders and lending institutions that don't have foreclosure charges on Personal Loans. As a result, in a cash emergency, you can get instant cash loan without burning a hole in your wallet due to excessive interest rates.
You might choose a part payment option if you have available cash that is insufficient to cover the total outstanding principal amount but can significantly reduce your loan burden. It can reduce the amount of owed principal, lowering your EMIs and real interest. If you choose this option, make a partial payment as soon as possible to save money by lowering your interest rate.
To live a debt-free life, most borrowers will choose the prepayment option. Apart from the economic effects, it will relieve you of the burden of making monthly payments for many years.
So, clearing debt before the end of your term seems a wise way to relieve financial stress. Let's look into the pros and cons to assist you in deciding.
Paying off a Personal Loan saves the borrower's money on interest costs that they would have paid if the loan had been kept open for the entire period. Let’s understand how to calculate the foreclosure amount of a Personal Loan. For instance, the EMI will be Rs.22,753, and the total interest cost will be around Rs.3.65 Lakh if a loan applicant seeks a Personal Loan of Rs.10 Lakh for a 5-year term at a 13% annual interest rate. They will save roughly Rs.2.09 Lakh in interest expenses if they settle the outstanding loan amount after one year.
Many Personal Loan borrowers believe they may save money on interest solely if they pay off their loan early in the term. Looking for a Personal Loan without prepayment charges can also help save funds.
The borrower can also save money on EMI payments if they pay off their debts sooner rather than later. To calculate the overall interest savings on a Personal Loan owing to prepayment/foreclosure, they should use an online Personal Loan prepayment calculator. Borrowers should, however, consider prepayment fees and other additional expenditures (if applicable) when calculating the net savings from using the prepayment option.
Banks/NBFCs like to lend to Personal Loan applicants whose total EMIs, including existing EMIs and the EMI for new loans, are less than 50% - 60% of their total monthly income. As a result, customers surpassing this limit have a decreased probability of getting a Personal Loan.
Prepaying an existing Personal Loan and thereby reducing their EMI/NMI ratio within 50%- 60% of their monthly income can help these borrowers improve their loan eligibility. A Personal Loan with no prepayment charges is also offered by some lenders.
The credit mix is the proportion of total outstanding secured and unsecured loans or other credit facilities.
Borrowers with a diversified credit mix in their loan portfolio get higher credit scores from credit bureaus.
Because Personal Loans are unsecured, they will reduce the proportion of unsecured loans in the credit mix if they repay them early. As a result, a higher percentage of secured loans might boost borrowers' credit scores, increasing their chances of getting another loan. Borrowers can leverage a Personal Loan with a prepayment option to be on the safer side.
Full foreclosure or payback of a current loan is a significant credit booster because it raises your CIBIL score and establishes a clean credit history. It will immensely assist you in obtaining loans and negotiating conditions with lenders in the future.
Prepaying a Personal Loan, despite its advantages, comes at a high cost: you'll have to make lump-sum payments to erase the balance, limiting your financial flexibility temporarily.
The RBI has prohibited all lenders from charging prepayment fees on Personal Loans with adjustable interest rates. On the other hand, borrowers who take out Personal Loans with fixed interest rates are not subject to this restriction.
Prepayment penalties of up to 5% of the outstanding principal amount of a personal loan are common. Prepaying a Personal Loan at a fixed rate can diminish interest savings. Many lenders also prohibit part-payments or foreclosure charges on Personal Loans until they receive several payments.
Many borrowers deplete their liquid assets or existing investments to repay their loans. However, doing so may jeopardize their ability to deal with any financial emergency that arises from events such as loss of income, medical troubles, or other unforeseen circumstances.
Borrowers may have to take out loans at a higher interest rate to accomplish unavoidable financial goals if they tap into current investments for that purpose. Existing Personal Loan customers should only choose prepayment if they have sufficient emergency finances to avoid this issue. They should also refrain from leveraging existing investments for unavoidable financial objectives.
So, before you decide to foreclose or prepay your loan, consider these variables and carefully consider the prepayment penalties, additional interest, and whether or not it would benefit you.
Prepayment is when you pay off your outstanding loan balance in part or entire before the end of your term.
Existing borrowers will find prepayment of a Personal Loan appealing because it helps them minimize their interest payments and overall repayment load. However, if the lender imposes prepayment penalties and a reduction in liquidity, this can be a deterrent.
Borrowers with limited liquidity can lessen their repayment burden and interest costs by refinancing the Personal Loan with a lender that offers lower Personal Loan interest rates.
For those who want to get rid of debt quickly, prepayment of a Personal Loan can be a great option. It also helps in boosting your credit score and increases EMI affordability.
Prepayment charges of 5% plus applicable taxes are levied upon Personal Loans with fixed interest rates. In the case of Personal Loans with adjustable interest rates, no charges are applicable. With Poonawalla Fincorp, we have 0% foreclosure charges if paid from own sources.
If you lack funds for the prepayment of a Personal Loan, you can always opt for part payment. This will significantly reduce your outstanding loan amount and will help you plan your upcoming EMIs.
Personal Loans come with a lock-in period of 1 year. Post that, you can pay the remaining amount of the loan and save on interest.
For individuals who are taking a Personal Loan, prepayment of their existing loans might increase their loan eligibility.
Summer is the best time to relax. This is a wonderful time to holiday as schools and colleges also take a long break. So, families are on the go during summer! Honeymooners, couples, friends, and families can enjoy their summer vacation at numerous locations around the world.
Banks and financial institutions provide personal loans to help meet personal financial goals, such as organizing a dream wedding, planning an exotic vacation, or clearing medical emergency expenses. A common question in the minds of most borrowers is - how much personal loan can I get?
Most Indians take their family on vacation in summer since most of the schools, universities and educational institutions are on break. It sometimes becomes confusing to find the perfect vacation spot with so many travel packages and travel recommendations.
The last two years have been very stressful for all of us due to the COVID-19 pandemic. The pandemic ravaged the entire world and resulted in massive loss of lives and the economy. Most of us were forced to stay inside our homes, and working from home became the new normal.
Digitalization has made it easier to get paperless loans online. Such paperless loans are usually approved within minutes or hours once they have been submitted. What`s more? You can apply for an online personal loan from the comfort of your home by simply visiting the preferred lender`s website.