Personal loans are a popular choice in India when it comes to meeting urgent expenses. Whether you need money for a wedding, to buy a commodity, or pay for travel costs, this type of loan can be of a lot of help. But high interest rates and EMI burdens of a personal loan often make borrowers consider prepaying it.
If you’re planning the same, you must consider the pros and cons of pre-closing your personal loan to make an informed decision. There are several ways of repaying a personal loan. Picking a suitable loan tenure and Equated Monthly Instalments (EMIs) is one option. The other is to prepay the loan in a lump sum.
If you don’t want a long debt burden, you can opt to prepay your loan and bear the pre-closure charges for personal loan. However, is a personal loan pre-closure advisable? Let’s find out:
Advantages of pre-closure of Personal Loan
If you have the means to prepay your personal loan, you can enjoy the following benefits –
- Quick process
As opposed to paying EMIs over a fixed duration of time, pre-payment relieves you of your debt in one go. You no longer have to pay EMIs every month with an added rate of interest. This helps you settle the debt quickly.
- No prepayment fees
Just like personal loan eligibility, rules and regulations regarding prepayment, fees can also vary with each loan provider. However, RBI mandates lenders to charge no extra pre-closure charges for personal loans that are on a floating rate of interest. With prepayment, you evade the additional rate of interest otherwise paid with EMIs and pay no extra prepayment fees. But if you have opted for fixed interest rates, you will have to bear the pre-closure charges for personal loan.
- Low Interest Outflow
Prepaying your personal loan partially or fully will reduce your overall interest payout on the loan. In most situations, bearing the prepayment charges is more economical than paying the complete interest on your personal loan.
- Better credit score
Your credit score is dependent on how soon you clear your debts. If you are already paying EMIs towards a loan, and require another loan in the future, your credit score may get impacted. On the other hand, pre-payment allows you to settle the personal loan and reflects positively on your credit score, increasing your chances of getting approved for another loan.
Additional Read:- Why a Personal Loan is Known as a Loan for Emergency Needs
Disadvantages of Pre-closure of Personal Loan
Paying off your personal loan early can also attract disadvantages like –
- Lock-in period
Most loan providers have a one-year lock-in period from the day the loan is disbursed. Even if you have the necessary funds to prepay the loan, you will still have to wait for this period to get over.
- Pre-payment charges
If the financial institution that lends you money has a policy of charging prepayment fees, you may have to pay extra charges. This can amount to similar to paying personal loan interest rates on your EMIs.
- Loss of lump sum funds
Even if you have the money to settle a loan, you may still have to cut back on other expenses in your budget. Saving or investing funds or contributing to an emergency fund can be more lucrative in the long run than prepaying a loan, especially if you end up paying extra fees to the lender.
The final verdict
The option to choose between pre-closure and picking loan tenure will depend on your unique situation, financial standing, and other goals. However, prepaying a loan without extra charges right after the lock-in period ends can be a good choice. This will improve your credit score and reduce your liabilities considerably. On the other hand, settling a loan with extra charges can be the same thing as paying personal loan interest rates. Before you make up your mind, it is advisable to understand the terms and conditions of your loan provider.
Additional Read:- Here are Some Myths About Personal Loan Which You Should Ignore
You can also check out Tata Capital’s personal loans that offer the benefit of zero charges on part pre-payment.