foreclosure charges on personal loan

Pros And Cons Of Personal Loan Prepayment In India

June 27, 2022 • 12940 views

As soon as a borrower receives additional funds as a gift or promotion, they plan to prepay their loan and become debt-free. However, before doing so, they should ask the lender whether there are any prepayment charges on the Personal Loan that they offer. Confirming this beforehand helps one save money that otherwise would have been paid as additional interest. 

Is loan prepayment a wise step moving forward? Read on to learn about this in detail.

What is Personal Loan Prepayment?

Prepayment is when you pay off your outstanding loan amount in full 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. However, some NBFCs charge a nominal fee when you decide to foreclose the loan agreement. Thus, if you are thinking of getting a Personal Loan without prepayment charges, you should consult with your lender before proceeding to sign the loan agreement.

Things to Consider Before Opting for Loan Prepayment

Paying off the debt ahead of schedule may feel like a wise choice, but is it always the best and most cost-effective option? Let's find out what it entails.

1. Full Prepayment

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 may be surprised to uncover public or private lenders and lending institutions that don't have foreclosure charges on the Personal Loan. As a result, in a cash emergency, you can get an instant cash loan at favourable interest rates without any hassle.

2. Part Payment

You may 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 EMI amount. If you choose this option, make a partial payment as soon as possible to save money.

3. Debt-Free

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.

Understanding the Pros And Cons of Personal Loan Prepayment & How It Works

Let's look into the pros and cons to assist you in deciding.

Pros of Prepayment

The benefits are as follows:

1. Interest Cost Savings

Paying off a Personal Loan saves you money on interest costs. Let’s understand how to calculate the foreclosure amount of a Personal Loan.

For instance: The EMI is Rs. 22,753, and the total interest cost is 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.

Looking for a Personal Loan without prepayment charges can also help save lifetime savings.

You can save money on EMI payments if you pay off your debts sooner rather than later. To calculate the overall interest savings on a Personal Loan owing to prepayment/foreclosure, you should use an online Personal Loan prepayment calculator. However, you should consider prepayment fees and other additional expenditures (if applicable) when calculating the net savings from using the prepayment option.

2. Increases Borrowers' EMI Affordability

While shortlisting borrowers, lenders tend to pick individuals whose cumulative EMIs sum up to an amount lesser than 50% of their salary/ income. As a result, if you surpass this limit, you have a decreased probability of getting a Personal Loan.

Prepaying an existing Personal Loan and thereby reducing the EMI/NMI ratio within 50-60% of the monthly income can help you improve overall loan eligibility. Thus, you should look for a Personal Loan with no prepayment charges from lenders.

3. Reduces the Share of Unsecured Loans in the Credit Mix

The credit mix is the proportion of total outstanding secured and unsecured loans or other credit facilities. Those with a diversified credit mix in their loan portfolio get higher CIBIL scores from credit bureaus.

Because Personal Loans are unsecured, It will reduce the proportion of unsecured loans in the credit mix if they are repaid early. As a result, a higher percentage of secured loans might boost your credit score, increasing your chances of getting another loan. You can leverage a Personal Loan with a prepayment option to be on the safer side.

4. Increases Your CIBIL Score

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.

Also Read: 4 Best Ways to Quickly Repay Your Personal Loans

Cons of Prepayment

The drawbacks include:

1. Having to Make Large Payments

Prepaying a Personal Loan, despite its advantages, comes at a high cost. You'll have to make lump-sum payments to erase the balance, temporarily limiting your financial flexibility.

2. Prepayment Penalty Fees

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 a Personal Loan cannot leverage this restriction.

Please note: Prepayment penalties of up to 5% of the outstanding principal amount of a Personal Loan are common. Many lenders also prohibit part-payments or foreclosure charges on a Personal Loan until they receive several payments.

3. Negatively Impacts Liquidity

Many borrowers deplete their liquid assets or existing investments to repay their loans. However, doing so may jeopardise their ability to deal with any financial emergency that arises from certain events like loss of income, medical emergencies, or other unforeseen circumstances.

So, before you decide to foreclose or prepay your loan, consider these variables and the prepayment penalties, additional interest, and whether or not it would benefit you.

How to Get a Personal Loan with Zero Prepayment Charges?

You can apply for a Personal Loan from reputed NBFCs like Poonawalla Fincorp. No penalty or foreclosure charge will be applicable if you decide to close the loan after 12 months provided you pay through your own sources. In case you avail of another financing service, you will need to bear a 4% prepayment charge.

Here are the quick steps to apply for a Personal Loan:

Step 1: Click on the 'Apply Now' button.

Step 2: Provide a few details and documents.

Step 3: Click on ‘Submit’.

You can use the online Personal Loan interest calculator to predict the EMIs. This will help you plan the prepayment amount wisely without stressing the budget.

Also read: Difference between part-payment, pre-payment, and pre-closure

To Conclude

Prepayment is when you pay off your outstanding loan balance in part or full before the end of your term. Existing borrowers will find prepayment of a Personal Loan appealing because it helps them minimise their interest payments and overall repayment load. However, if the lender imposes prepayment penalties and a reduction in liquidity, this can be a deterrent. So, choose your lender wisely and conduct sufficient research before taking a loan.

Frequently Asked Questions

  • Is prepayment of a Personal Loan a good idea?

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.

  • Are there any prepayment charges on Personal Loans?

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, you can enjoy 0% foreclosure charges if paid from your own sources.

  • Is it really beneficial to make partial payments on your Personal Loan?

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.

Disclaimer

We take utmost care to provide information based on internal data and reliable sources. However, this article and associated web pages provide generic information for reference purposes only. Readers must make an informed decision by reviewing the products offered and the terms and conditions. Personal Loan disbursal is at the sole discretion of Poonawalla Fincorp.
*Terms and Conditions apply

poonawalla fincorp team

Poonawalla Fincorp Team

Our team of expert writers and editors are passionate about providing authentic and valuable information on finance. Our aim is to simplify financial and finance-related concepts. We strive to help our readers become more aware and empowered to make informed financial decisions.

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