Taking out a personal loan is the most common financial alternative, whether for medical crises, weddings, vacations, or any other reason. However, many people are concerned about the repayment of personal loans. Because of the high-interest rates and EMI burden connected with loans, many borrowers contemplate prepaying or foreclosing on their existing personal loans. Prepaying a personal loan is usually advantageous for borrowers; nevertheless, to make an educated decision, borrowers need first do an in-depth cost-benefit analysis.
What Exactly Is Personal Loan Prepayment?
Personal loan prepayment is the act of repaying a personal loan in full or in part before the term expires. Borrowers can repay their loans ahead of schedule, lowering their overall interest load and potentially saving money. Depending on the lender’s regulations, prepayment can be performed in one single sum or many payments. Some financial institutions may levy a penalty or cost for early repayment, but others may provide incentives to borrowers who prefer to prepay. Before making a decision, it is critical to properly assess the repayment terms and conditions to ensure they match your financial goals.
What is the Personal Loan Prepayment Penalty?
A prepayment penalty is a cost charged by lenders when a loan is repaid before the agreed-upon maturity date. This penalty is intended to reimburse the lender for lost interest income and discourage early repayment. The penalty amount varies according to the loan agreement and the outstanding loan balance. Borrowers should carefully analyze the personal loan terms and conditions to see whether a prepayment penalty applies and include it in their decision-making process.
LoanTap charges 5% of the outstanding amount plus applicable taxes if the loan is repaid within 6 months of disbursement.
How does a personal loan prepayment affect your credit score?
The act of prepaying your loan does not affect your credit score, either favorably or adversely. However, when your outstanding debt is lowered following prepayment, your credit score improves. Paying off your debt is also beneficial to your mental health. That is sometimes more essential than the credit score.
How can I avoid a personal loan prepayment penalty?
If you have been paying your loan EMI on time for the past six months, you can pay back the loan without penalty at LoanTap.
This will save you a substantial amount of money that you would have otherwise paid in interest on the outstanding loan amount.
Should you choose to pay off your loan early?
Getting out of debt as quickly as possible is a situation that many individuals prefer. If you fall into this category, it makes sense to pay off the loan as soon as possible, with or without the prepayment penalty. This is because, even if you pay the prepayment penalty, you will still save significantly on your overall interest costs. Ultimately, the mental peace that results from paying off your debt is more important than small prepayment charges.
However, if you are going to pay off the loan early, make sure that you have enough left over in your savings after paying off the loan. If you are going to significantly drain your savings to prepay the personal loan, then it is not advisable, as soon, you may need to take another loan in case an emergency strikes.
FAQs about Prepayment of Personal Loans
Is there any penalty for the prepayment of a personal loan?
Yes, generally, lenders charge a penalty for the prepayment of personal loans. Usually, the penalty starts after the lock-in period that is decided by the lender.
What is the prepayment penalty for a personal loan at LoanTap?
LoanTap levies 5% of the principal outstanding plus applicable taxes if paid before 6 months of the loan disbursal. However, if you have been regular with your EMIs for the first 6 months, then there is no prepayment penalty if you choose to prepay the loan after that period.
Is it a good idea to pre-close a personal loan?
Pre-closures do enable you to significantly reduce the amount of interest and EMIs that you would otherwise have to pay throughout the loan. Hence, for your peace of mind and long-term financial well-being, it makes sense to pay off your loan as early as possible, without worrying about whether or not prepayment charges will be levied.
What is the difference between prepayment and preclosure?
Prepayment refers to partial loan prepayments made before the end of the term, whereas foreclosure refers to full loan repayments made before the end of the tenure.
When can I prepay my loan?
Prepayment, or paying the entire outstanding sum before the loan’s term is over, is one way to stop the flow of interest, though. Only when you have successfully repaid the first 12 EMIs on a personal loan you are permitted to prepay it.