Should You Prepay a Personal Loan? – Know the real worth

It is not the complete closure of the loan; instead, one pays a portion of the loan amount beforehand.

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When to avoid prepayment:

• You have better investment options: If you expect your investments, business, or SIPs to earn more than the interest you are paying on the loan, keeping the money invested may be worth considering.
• You need to plan your taxes: If you still have tax-saving investments to make before the end of the financial year, you may want to keep some money aside for them.
• Your emergency savings are low: Do not use most of your savings to repay the loan if it leaves you without enough money for unexpected expenses.
• Your loan has a low interest rate: If the interest rate is lower, compare the possible investment returns before deciding to prepay.

A Simple 3-Factor Check

Before making a prepayment, ask yourself:

• Will I still have enough money in my emergency fund?
• Will the money I save on interest be better than the returns I could get from investing it, after considering any prepayment charges?
• Do I have other important financial goals that need this money?

Hence, these are the things you should consider before prepaying the personal loan.

How does prepayment affect your personal loan? 

Prepayment of a loan significantly affects the personal loan by reducing its principal amount if you choose partial payment, total interest payable, and loan instalment burden if you choose foreclosure. 

A personal loan is a loan taken for multiple reasons, and almost all banks in India support personal loans. Prepayment of a personal loan can significantly affect a personal loan’s mechanism; the principal amount goes down due to the portion of the amount that is already cleared, and this affects the person’s interest payable capacity.

The following are the factors of the personal loan that are highly affected by the prepayment: 

1. Interest payable = The interest payable will fall due to the prepayment of the loan amount in portions because it also affects the principal amount.
2. Principal amount = Paying a portion of the money beforehand to reduce the loan load causes the principal amount to be significantly reduced. For example, you have a ₹500,000 personal loan, and you prepaid ₹300,000; then the same loan will come down to 200,000 rupees.
3. Loan burden = less principal amount to be paid and lower interest payable, which will definitely mitigate the burden of the loan repayment; this is because the repayment becomes manageable rather than a hassle.

      d. Loan burden will be eliminated = when you choose foreclosure of a personal loan, you completely eliminate the burden of EMIs, interest rate, etc. 

Hence, these are the factors that are highly affected by the prepayment of the personal loan. 

Bottom line: 

Prepayment of the personal loan helps to mitigate the financial burden on oneself by reducing the interest rate burden, principal amount, and loan instalment. Many people in India follow this practice for these major reasons, and it also helps to build the credit score without harming it. Several banks provide different charges on the prepayment of the personal loan; some provide different charges for loan closure and loan prepayment. Hence, prepayment is the safest way to clear your loan early without harming the credit score; in return, one will get benefits, but with the exception of the charges, which vary from bank to bank. At last, it is the person’s choice to take the personal loan or not. 

FAQs

How to close a 20-year loan in 10 years? 

One can close the 20-year loan in 10 years by paying a portion of the total loan amount, which will reduce the principal amount and the EMI burden. Second, the complete loan amount is paid off beforehand, which will completely eliminate all the loan payments at once. 

What happens if I foreclose my personal loan? 

If one forecloses on the personal loan, then one will eliminate the financial burden without harming the credit score and with no future loan repayment; the loan will be considered officially closed. 

Is it good to close the loan? 

Yes, closing the loan is often considered positive. This is because it does not create a further burden on the banks and borrowers to push the flow of loans. It also signifies good maintenance of the credit score.

Can I pay 2 EMIs in advance? 

Yes, many lenders allow this, but some banks may charge a minimal amount to carry out this practice, or some may charge in the form of a percentage. 

Who is not eligible for the personal loan? 

People with very poor credit scores, those with no proper job stability, and those with no monthly income. Moreover, people who do not meet the eligibility criteria for the personal loan often have their personal loans not approved by banks. 

What is the 7-year rule of credit scores? 

In India, the CIBIL general retains negative marks, such as defaults, settlements, or written-off accounts, on a credit report for 7 years from the date the account was closed or last reported delinquent, after which they are removed. 

What is the meaning of prepayment? 

The meaning of 'prepayment' refers to the action of paying the full loan amount to the lender before the actual loan tenure ends or paying a portion of the loan amount to the lender to reduce the principal amount. 

What is an example of prepayment other than a loan? 

An example of prepayment other than a loan can be paying bills to the cafe before you finish your food, a subscription to OTT channels, etc. 

Can prepayment of a loan only be done for personal loans? 

No, prepayment is not only done for the personal loans but also for the various types of loan as per the bank policies.

What is one similarity between the loan foreclosure and loan part-payment? 

The similarity between them is that both of them reduce the financial burden on the borrower.