What Are The Advantages Of Prepayment And Part Payment Of Personal Loan?
An old adage says it would be best to borrow as little as possible and repay the debt as quickly as possible. It is particularly true for personal loans that can be heavy on your pocket with a high-interest rate.
A personal loan is quite a popular product available in the credit market as it helps individuals overcome a temporary financial crunch. A personal loan applicant can get the urgent funds required during an emergency or a planned motive. The credit received against a personal loan can be used for a big expense, event, consumer durables, treatment or even vacation. Lending institutions offer personal loans with varied facilities. One of these is part payment of personal loan or full payment before the loan tenure ends.
Since personal loans are unsecured loans and lenders bear a high risk of default on loans, they may charge a high-interest rate, especially when an individual does not maintain a good credit history and has a low CIBIL score. Most borrowers want to repay the loan as soon as possible to reduce their financial obligations. There is a facility to make a prepayment or part payment for the loan. Reputed NBFCs offer a full prepayment facility at 0% charges. Thus, if a borrower has the means to pay off your loan earlier than completing the loan tenure, to be free from a few obligations. Let us understand different aspects and know the advantage of personal loan prepayment.
What is Personal Loan Prepayment?
The term is explanatory itself. Prepayment means paying off debt before the repayment tenure ends. The borrower can pay the principal amount and accrued interest until the agreed prepayment date. If a borrower can repay the personal loan in full or pay it partially, they can benefit from certain advantages. Consider NBFCs for the best personal loan interest rates and other benefits.
Advantages of Prepayment
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Reduced Debt-Burden
Stay debt-free and stress-free. In case you have to take a personal loan to meet sudden financial obligations, make prepayment if possible. It will lead to a stress-free life without the risk of financial failure due to regular EMIs, and more disposable income in your hands to save.
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Save Big on Interest Amount
Lending institutions allow the borrowers to prepay the entire loan amount before completing the loan tenure. Generally, prepay the entire loan after one year of the loan tenure. This duration may vary with different brokers.
First, the borrower can save a lot on interest. For example, you are paying EMIs for a personal loan of Rs. 3 lakh with a tenure of 5 years and approved at an interest rate of 15%, and the monthly EMI comes to Rs. 7,137. The customer would have paid Rs. 1,28,219 as the total interest. If the borrower is ready for full repayment at the end of the first year, they can save Rs. 86,132 from the interest amount calculated on the loan.
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Positive Effect on Credit Score
When you close a loan account on time without delayed EMIs, it shores up your credit score. Similarly, if you prepay an ongoing personal loan, it shows your disciplined nature towards your debts, which adds to your credit score. There will be no immediate effect on your credit score, but the effect of prepayment of a loan will be seen in the long run. On the other hand, if you pay a loan partially, part payment of a loan will not have an effect on your credit score. With an improved score, an individual can bargain for more favourable loan terms from the lender.
Take a look at common foreclosure charges
Lenders charge certain charges for the loan pre-closure facility. However, it is not applicable after a certain number of EMIs.
| No. of EMIs paid | Prepayment Charges |
| 0 – 17 EMIs | 7% of the Principal Outstanding |
| 18 – 23 EMIs | 5% |
| 24 – 35 EMIs | 3% |
| 36 or more EMIs | No fee |
Personal Loan Prepayment Procedure
- A borrower can call the customer care of the lending institution, send them an email or visit the nearest branch.
- Another option is raising the request at the customer service portal / mobile app through your login details.
Get the foreclosure ID and proceed to the prepayment towards your personal loan. The lender will hand over an acknowledgement of the payment to you.
Loan Closure Requirements While Making Prepayment in Full
- Documents related to the loan.
- ID proof and Address proof – Aadhar, Voter’s ID, Passport, etc.
- Latest Statement of the loan.
- Demand draft or Cheque to pay the outstanding loan balance.
Thus, one can maintain a high credit score with a spotless credit report and reduce the debt burden with a prepayment option. If you are able to prepay or part pay a loan with the available means, it is best to go for these options. You may find some lenders that allow you to pay off the entire outstanding loan amount against prepayment options and there will not be a part-payment option.
