Personal loans are a convenient way to fund short- and mid-term goals. Personal loans aren’t just for those who may not be able to afford to buy something; even people who may not want to spend a considerable amount immediately, despite having money available, choose to apply for such loans.
Like all loans, personal loans also come with financial implications. At the same time, such loans also carry multiple benefits, especially if you plan to prepay them. Most financial institutions have a minimum lock-in period, which is usually set at one year (but can be more, depending on the provider). However, once the lock-in period is over, you can choose to prepay the loan. This way, you can complete the monthly EMIs earlier than expected and enjoy additional advantages. If you’re looking to prepay your personal loan, here are some things you need to keep in mind:
When you apply for a personal loan, the longer repayment tenure sounds like a wise choice since it reduces the monthly EMI. However, in the longer run, this quickly adds up to a pretty substantial interest amount. If you prepay or part-pay ahead of the end date, you can save a decent amount of money you might otherwise pay as personal loan interest rates.
A caveat to saving up on interest by prepayment of personal loans is that you have to bear the prepayment charges. Usually, these vary from one financial institution to another and are generally fixed at around 3 – 5%, depending on your provider. However, when pitted against the added interest during the tenure of the loan, the prepayment charges are still nominal.
Opportunity to go debt-free faster
One of the most important reasons for prepaying your personal loan is that you can avoid the debt burden that exists. A lot of people might have multiple loans to repay. Right from a car loan to home or personal loans, there could be several to take care of. Hence, repaying one such loan reduces the debt burden significantly and allows you to channel more outflow towards the other loans, thereby reaching a debt-free stage earlier than expected.
Improve credit score
Your credit score becomes very important when it comes to your financial standing. It’s often taken diligently into consideration by loan providers when you’re applying for loans, and for other financial decisions. A big benefit of prepaying personal loans is that it gives you the chance to go debt-free, which in turn improves your credit score. If you’re unable to settle the entire personal loan amount at one go, even partial pre-payment affects your credit score positively.
If you’re planning to take a personal loan, you can opt for a longer tenure to reduce the immediate interest burden during the lock-in period. However, do keep in mind that you should plan to prepay the loan amount to enjoy the benefits mentioned above. Consider taking a personal loan from Tata Capital to avail of attractive interest rates and easy prepayment options.