Pros and Cons of Personal Loan Prepayment in India

Sept 30, 2020Personal Loan

Life is not a bed of roses; it has its ups and downs which we have to endure with grit and courage. But, there are situations when we have to look beyond our financial means to overcome it. At such a time, the personal loan comes as a great savior. They are easily available and offer great flexibility in terms of usage, tenure, and repayment.

And, at some point, if your financial situation turns around, you can prepay the loan amount to reduce your debt. Perhaps even foreclose the loan and enjoy a debt-free life. But, before paying off a personal loan early, you need to weigh all the pros and cons of personal loan prepayment. 

Let’s first understand the factors affecting personal loan prepayment

What is a Prepayment Penalty?

Every lender inserts a prepayment penalty clause in the personal loan documents, which states the percentage of the amount that will be charged if you decide to pay off the loan early. Lenders usually charge this fee as prepayment or foreclosure causes them to make a lot of changes in their internal systems, which often comes at a cost. At the same time, borrowers are also encouraged to pay the monthly EMIs on time and save more money in the long term.

As per the RBI directive, lenders can only charge prepayment fees on the outstanding loan amount. Fullerton India’s charges for both prepayment and foreclosure ranges between 0-7%.

Must Read: Difference Between Short Term and Long Term Loans

Is Prepayment Worth for Users?

If the lender doesn’t charge any prepayment fee, the borrower stands to benefit from prepayment as they can save on the interest amount.

But, if there is a prepayment fee, the actual benefit for borrowers depends on the remaining tenure of the loan, outstanding loan amount, and prepayment charges. So, how do you calculate the actual benefits?

You can either use an online calculator to check your Personal Loan Prepayment savings by paying early. Or, calculate the total interest outgo for the outstanding loan amount manually. If the interest outgo amount is greater than the prepayment fee, you benefit by repaying your dues.

Benefits of Loan Prepayment

Paying off your loan can be a good decision and offers you multiple benefits.

  • You Save Big on Interest Amount

In case, you opt for full prepayment of the entire outstanding loan amount, you tend to save a lot on interest outgo. 

For example, in a personal loan amount of Rs 3 lakh at an interest rate of 15% and term of 5 years, the EMI for the loan comes in at Rs 7,137 with total interest payable is Rs 1,28,219. If the customer decides for full repayment at the end of the first year, the total interest saving will be Rs 86,132.

And, in case of part prepayment, it not only translates in interest savings but also reduces the loan tenure. A mere Rs 50,000 prepayment at the end of 6th EMI will translate into 32% interest savings. 

  • Positive Effect on Credit Score

A spotless credit report with clean loan repayment records is more desirable and lenders also prefer giving a loan to such users. 

Full prepayment or foreclosure of your ongoing personal loan is considered positive and helps to increase CIBIL score. An improved score helps to successfully close your next loan application and also bargain for more favorable terms from the lender. This is not applicable, however, in the case, the foreclosure is done with the intention of a personal loan balance transfer.          

  • Reduced Debt-Burden

Being debt-free has its own advantages. It leads to a stress-free life, enables you to attain financial independence earlier, reduces the risk of financial failure, and more disposable income in your hands. 

Disadvantages of Personal Loan Prepayment

Some of the disadvantages of paying off personal loan early:

  • Have to Make Lump Sum Payment

As the saying goes, Cash is King and having a sufficient amount of cash in hand gives confidence and ability to fight small emergencies or cater to immediate requirements. 

By making a prepayment in a lump sum, you will be losing your financial flexibility and may stand at the risk of financial failure.

  • Paying Prepayment Charges

You are liable to pay the prepayment penalty charges when you are repaying the loan early. There might be other charges also like foreclosure charges, administrative charges, and other fees. 

Must Read: Complete Guide About Fullerton India Personal Loan

Bottom Line

Before exercising the option of prepayment of personal loans, it is important to consider all the factors discussed above. If you are gaining significantly from the entire transaction, then only you should go ahead with the transaction.

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