A personal loan can help you in times of your financial needs. But it is a long-term commitment which can eat into your savings. Most of the personal loans are disbursed with high interest rates. Therefore, you might be taking a ₹2 Lacs loan but will end up paying ₹2.5 or ₹3 lacs to the lender. Therefore, it is advised by financial experts to try and get a foreclosure of the loan.
Moreover, it is very important to take a personal loan from RBI approved and trustworthy lenders. You can check your pre-approved loan offers from Airtel Flexi Credit. We will talk further about this in the article.
In other terms, one should consider prepayment of the personal loan if any extra income comes by your way. If you are not aware about what is prepayment of personal loan and wish to know the complete details, this is the article for you.
We will discuss following topics in the article:
- What is prepayment of personal loan?
- Why are there prepayment charges?
- Benefits of prepayment of personal loan
- Personal Loan prepayment calculator
So, let’s get started!
What is prepayment of personal loan?
Prepayment of personal loan is basically paying your loan early. The prepayment can be partial or full in nature.
For example: If you have taken a loan of ₹1,50,000 in the month of January 2021. Your EMI for X amount including interest will usually start from the next month of February 2021. Let’s say, you get an extra income of ₹40,000 in the month of March 2021. If you pay ₹30,000 for your loan in the month of March instead of the small EMI amount for March, it is referred as partial prepayment of the loan.
Starting April, your EMI amount will be readjusted and reduced due to the partial prepayment. The interest amount will also reduce as it is calculated for the due amount.
But, if you are making a partial or full prepayment of loan, you will have to pay a nominal prepayment fee. Wondering why?
What are personal prepayment charges?
The banks earn money with the interest they charge on the principal loan amount. So, when the loan runs with set EMIs, the interest amount becomes the bank’s earnings. Therefore, longer the duration of the loan, higher the EMIs and interest amount for the banks.
Now, if the customer opts for prepayment, the rate of interest the bank would earn otherwise over the extra period reduces. The interest is calculated on the remaining due amount. So, to make up for this loss, banks charge a prepayment fee.
These charges vary for different banks. The charges also depend on the completed loan tenure. Many banks may provide personal loan with zero prepayment charges after completion of say, 3 years. While others may merely reduce the charges after a given time.
Thus, it is advised to check with the bank about their prepayment fee and policies beforehand.
Benefits of prepayment of personal loan
Prepayment of your loan is not a necessity, but it is a beneficial option. Here’s why.
Get rid of your debt faster
No one knows better than you what a burden a personal loan can be! Prepayment is a way to get your loan closed faster. Your loan EMIs every month can take up a chunk of your savings money. Therefore, if you have extra income coming your way, you should consider using it for full or partial foreclosure of your loan. While you may have to pay a nominal prepayment fee, it is better than paying high interest rates every month.
Improves your credit score
Your credit score is very important to get any future loans approved. Paying your EMIs on time every month can help you build your score. But when you partially pay your loan, it immediately provides a boost to your score.
Pay less interest rates
If you pay your loan amount partially, it reduces the interest rate charged. Moreover, you can also reduce your debt burden. Partial prepayment for personal loan paid in early tenures can reduce the interest amount to a huge extent.
Even with personal loan prepayment charges, you would still be saving a lot on the interest amount.
Personal Loan prepayment calculator
If you wish to calculate what your revised EMI will be after partial prepayment, there are various personal loan prepayment calculators available online. All you need to do is enter the following details:
- Loan Amount
- Interest Rate
Once you enter these accurately, the revised EMI and revised Tenor will show up in the result. You will also see the percentage and amount of the EMI saved.
The calculator shows positive effect of early repayment of loans.
Therefore, we advise you to pay your loans either in full amount or partial amount to get a positive financial impact, lower your debt, and interest burden.