Personal loans often become our saviours at times of financial distress. They offer great flexibility in terms of tenure, usage, and repayment. However, if your financial situation turns around, you may choose to foreclose the loan and enjoy a debt-free life.
Whether you have availed of a personal loan for travel, medical emergency or home renovation, there are some things you need to consider carefully before prepaying your loan.
To begin with, you must understand what the prepayment penalty clause in your loan agreement implies, which is the percentage of the money charged from the applicants who choose to clear their dues early.
Let us say you have applied for a travel loan and have chosen to prepay it early. In case of a foreclosure, many changes have to be made in the lender’s internal systems. To avoid such events caused by a loan prepayment, lenders choose to encourage borrowers to repay their dues through scheduled monthly instalments and save money in the long run.
Advantages of Loan Prepayment
- Significant savings on interest: Prepaying your loan helps you cut down a lot of expenses towards the interest payments. For instance, a person who has availed a loan of Rs. 3 lakhs at a 15% interest rate can save about Rs. 86,132 if she prepays the entire loan amount by the end of the first year.
- Positive effect on the credit ratings: Foreclosure of your loan can impact your credit rating positively and increase your CIBIL score favourably. If you are looking to apply for a loan, say a personal loan for travel, the improved credit score will surely help you secure better loan terms.
- Quicker debt repayment: Living a life free from debt means no more financial distress. You can attain financial independence earlier and be relieved from the stress of monthly EMI payments faster. Prepaying the loan also leaves you with more disposable income.
Disadvantages of Loan Prepayment
- You are required to make a lump-sum payment: Having a sufficient amount of liquid cash in your hand gives you the confidence and the capability to fight any unexpected emergencies. As such, any immediate financial requirements do not take a toll on your financial health. But, if you wish to prepay the loan, you need to repay the remaining loan amount in a lump sum. Thus, you may lose your financial flexibility for the days to come.
- Prepayment penalty: You are liable to pay a prepayment penalty if you wish to foreclose the loan before your tenure is over. The applicable charges, including foreclosure charges, administrative charges, GST, etc., are typically specified by the lender in the loan agreement.
The Bottom Line
As you can see, prepayment of loans has its pros and cons. Therefore, it is in your best interest to weigh the consequences of prepaying your loan and make the final call accordingly. In any case, if you have surplus funds at your disposal, prepaying the loan can ease your debt burden favourably.
Interested in taking out a loan for personal needs and travel? You can check out your personal loan eligibility online with a lender of your choice.