Prepaying loan good option, but check T&Cs

Whether you need to make a big purchase or need money for a medical emergency, whether it’s wedding expenses or paying for higher education, a personal loan in such cases becomes very useful. It helps meet all such needs.

However, after taking a loan, its repayment becomes a problem. Due to high interest rates, many times the interest amount even exceeds the loan amount.

In such a case, prepayment of a personal loan can help you repay the debt faster. Also, the total interest amount is reduced.

Loan prepayment is an important thing that you should pay attention to while repaying the loan. But even then, sometimes additional charges and fees have to be paid. Therefore, it is necessary to know about the charges, features and benefits associated with prepayment.

So, what is personal loan prepayment?

Banks or NBFCs give the option of paying the loan before the due date, which is called prepayment.  Let’s understand this with an example. Suppose a customer takes a loan from a bank for 5 years at an interest rate of 15%. In the third year of the loan, the customer is in a position to repay the loan before the due date. Now he can repay the entire loan amount by the end of the third year.

But the method of prepayment will depend on the terms and conditions associated with the loan.

Different banks or NBFCs charge different prepayment fees. This fee is charged, because when you prepay the loan, the bank or NBFC incurs a loss. Former banker Ashwini Rana says that banks or NBFCs give you a loan for a fixed period. The interest earned on that loan is their income. If you repay the loan before time, it impacts their income. Therefore, a charge of 4 to 5 percent is levied on the remaining loan amount.

The prepayment fee can also vary depending on the loan tenure. Where some banks charge zero prepayment fee after 3 years, some offer a discount on the prepayment fee after a fixed period. This prepayment fee is also called a foreclosure charge.

There are various benefits of personal loan prepayment, the first benefit is that your credit score improves. Your credit history becomes better.

Further, when you apply for another loan, it will be easier to get the loan approved. And a lower interest rate may also be offered.

The second benefit is that your interest cost is saved. When you pay EMIs until the end of the full payment period, the interest cost levied on the loan amount is higher. But by prepaying, you reduce this cost.

Part prepayment also helps. By repaying a portion of the loan before time, the outstanding loan amount is reduced. This also reduces the EMI and the total interest.