Many people take personal loans all over India. Compared to other loans, it remains the most in demand. Personal loans can be used for any purpose. It is not like a home loan or a vehicle loan, whose purpose and conditions are for the same purpose. People use personal loans for travel, festival celebrations, gadgets, household items and wedding preparations. Most people take a loan thinking that they will repay it before time, while many are in the turmoil whether to use this option or not.
Many people opt for a long-term option with a low interest rate while taking a loan, thus the monthly EMI has to be paid less but the interest rate will have to be paid more as the loan period increases. If you have surplus money in your hand, use this money or save to repay the outstanding personal loan ahead of time. But repaying personal loans ahead of time has many advantages. Calculations will be calculated based on the outstanding balance.
Benefits of personal loan prepayment
Loan duration and loan amount reduction
Even if you have taken a loan of 3 lakh rupees for 3 years, then it is possible that you can pre-close the loan with some extra money. In this way your monthly EMI amount will be reduced and it will not be necessary to continue the loan for a long period. The sooner the loan is repaid, the lower the burden. Most personal loans have a lock-in period of one year. Only after this you can pre-close the loan.
Use this lock period to prepay the loan and collect sufficient cash. Also, plan to invest EMI amount in some other high return investments. Consider the lock period of your personal loan and spend this time planning your finance. There is no ideal right or wrong way. It should be decided by every person’s income and ability to bear the debt, when to pre-close the loan.
No prepayment charges
It is always good to be debt free. But in such a situation it is equally important to keep in mind that if you are not paying too much amount as a pre-closure charge. Be sure to check the loan period before pre-closing or not. For example, if the loan is only for the next 6 months or less, do not pre-close it. If the loan is at floating rate of interest then no pre-payment charges will be levied. According to the RBI circular, if the loan is at floating rate of interest, then it is mandatory not to impose pre-closure charges.
Do not take any action based on assumptions only
Talk to your lender before requesting to prematurely close the loan to know how the processing will take place and what are the charges related to pre-closure. Calculate what amount you will save and whether it is worth the effort you are making. If the option is worth it, then go ahead and request a pre-closure on the personal loan.
Increase in credit score
Credit score is directly related to the outstanding debt. If you repay the loan or credit card dues well in advance, it is reflected in your credit score. Pre-closing and partial payment are sensible ways in which you can increase your credit score. Based on its ranking, banks and NBFCs consider giving you loans or not in future. The prepayment of the loan is equal to the successful payment of the outstanding loan and the closing loan. This will give good feedback to individual and banks and NBFCs will be happy to give loans if needed in future.
Premature loan repayment losses
Prepayment Charges / Penalty is the amount the customer pays on repayment of the loan amount in advance. The pre-payment charge is different for each lender. There are also some lenders who do not charge any pre-payment penalty. But you have to check it only while choosing the lender. The amount to be taken as pre-payment penalty also depends on the outstanding principal amount and the remaining period.
Most lenders give loans that have a lock-in period. During this time the customer cannot prepay the loan. Generally, the lock-in period of most lenders is 12 months from the day of loan disbursement. So even if you have money for pre-payment of the loan, you still have to wait for the lock-in period to end.
Do not end savings
Having money is a blessing in itself. Invest it you prepare capital for the future. In addition, emergency funds are also made, so that if anything important is needed, it can be spent there. But on pre-payment, all your savings can also end.