Personal loans are easy-to-get, quick, convenient and flexible. So, it is of no wonder that personal loan is one of the most popular financial products in the country. In spite of its popularity, most Indians feel the need of risk aversion and more often than not, they want to go for loan pre-closure whenever their finances allow it.
What does personal loan pre-payment mean?
Pre-payment or early repayment is a payment you make towards your loan repayment before the completion of your loan tenure.
When should you consider pre-closing your personal loan?
The best time to pre-close your loan is in the initial stages of the loan tenure. If pre-payment is done relatively early into the loan tenure, you tend to save a lot of money on the interest.
Personal Loan Pre-Payment Possibilities
There are two ways of making pre-payments: paying off the loan completely or paying it by part. Banks cannot stop you from making pre-payments, however, they can charge you a penalty for it. Most of the banks levy pre-closure charges for a personal loan ranging from 1-4% of the outstanding loan amount.
Let’s understand in detail the personal loan pre-payment possibilities:
Usually, banks have a lock-in period of 1 year. If you want to pay off your outstanding principal amount in full or part, you will have to wait until that period ends.
1. Personal Loan Part Pre-Payment
You can use your surplus money to make part payment of your loan once the lock-in period is over. The part payment will reduce the total outstanding principal loan amount. The interest will then be charged on the new reduced outstanding loan amount, thus helping you save money. Let’s understand this better with the help of an example:
Let’s assume that you take a personal loan of ₹ 4 Lakh at an interest rate of 14% for 3 years.
- You’ll pay off ₹ 1,15,263 of the total principal amount during the lock-in period.
- You’ll be left with balance amount of ₹ 2,84,737 once the minimum commitment period ends.
Personal Loan Part Pre-payment: Quick Takeaways from The Above Example
- A part payment of ₹ 1,00,000 once your lock-in period ends will reduce your outstanding principal amount to ₹ 1,84,737.
- Interest will be charged on the reduced outstanding amount, thus helping you save a significant amount.
2. Personal Loan Full Pre-Payment
With the help of the same example, let’s understand how personal loan full pre-payment is beneficial.
Let’s assume that you take a personal loan of ₹ 4 Lakh at 14% interest for 3 years.
- You’ll pay EMI of ₹ 13,671 every month.
- You’ll have to pay a total interest of ₹ 92,158 during your entire loan tenure.
- You’ll pay a total interest of ₹ 48,790, that is, approximately 52% of total interest cost during the minimum commitment period.
Personal Loan Full Pre-payment: Quick takeaways from the above example
- Paying off your entire outstanding principal amount once the lock-in period ends will help you save 47% of the interest cost, that is ₹ 43,368.
- If you decide to pay off your entire debt at a later stage, you still will be able to save a substantial amount of interest cost.
So, what’s the bottom line here?
Pre-payment of personal loan can benefit you if you make it in the initial phase of the loan or as soon as your lock-in period is over. If your bank charges a penalty for full pre-payment or part pre-payment of your personal loan, weigh which option is more beneficial, paying the penalty or saving the amount in interest and then decide your next move.
How can you pre-close your MoneyTap Personal Loan 2.0?
MoneyTap’s personal loan closure procedure:
To foreclose the loan, you need to contact the bank/NBFC you have been approved the personal loan from and inform them about your desire to foreclose the loan.
For RBL approved customers, here are a few things you may want to take a note of:
- For any app to bank account transfer foreclosure, there are no additional charges.
- For any credit card spends converted to an EMI foreclosure, 3% charges apply.
- No part pre-payment is allowed.
FAQs on Personal Loan Pre-Payment
The guidelines for the pre-closure of your MoneyTap Credit Line are different for different finance partners. - If your credit line has been approved by RBL Bank, you can pre-close your loan whenever you want. There are no pre-closure charges attached. - For other finance partners, you can pre-close your loan only after you have paid at least 3 EMIs. 3% of the outstanding loan amount will be charged to pre-close the loan.
There is no immediate effect on CIBIL if you pay off your ongoing personal loan entirely. However, in the long run, closing a loan successfully does have a positive effect on your credit score. On the other hand, partial or part pre-payment doesn’t have any effect on your CIBIL, although it reduces your total loan burden.
If you have decided on pre-closing your personal loan, these are the steps you need to follow.
- Contact the branch where you have taken your personal loan. Ensure that you have all the documents and your chequebook.
- Express your intention to pre-close your personal loan to the loan officer.
- The loan officer then will determine the outstanding amount and penalty if applicable. You will have to submit a DD/cheque for the penalty charge.
- Once the lender/bank processes your cheque /DD, you’ll receive a personal loan pre-closure acknowledgement receipt within 2 weeks.
Simply put, a personal loan closure is closing of a personal loan. Given below are the types of personal loan closures:
Pre-closure: In this type of closure, you pre-pay the outstanding amount to close the personal loan.
Regular closure: In this type of closure, you pay your EMIs regularly throughout the agreed loan tenure. This process takes place without involving any additional terms and conditions.
Bad loan closure: In this type of closure, the bank writes off the loan because of continuous defaults on payments over a certain period of time.
No. If you decide to pre-pay, you just need to pay the outstanding balance on the personal loan and not the interest. But banks may charge a penalty for pre-paying the loan. It is their way of compensating the money they lose on the interest that they would have earned if you had continued paying the EMIs for the agreed loan tenure.
Pre-payment is a good way to get your personal loan principal amount down. It usually happens when you have idle cash to spare, but that’s not equivalent to the whole principal amount.
Pre-payment of personal loan works because it lowers the outstanding principal amount, which means your monthly EMIs may also reduce. This is an easy and effective way to save on the interest amount.
However, making a small part pre-payment may not help, especially if you have to pay the pre-payment charges.
You can easily calculate the EMI after the pre-pay just the way you calculate the EMI amount before you apply for the loan. You can use a pre-payment EMI calculator to find out the exact amount that you will need to pay. This pre-payment amount includes pre-closure charges depending on the policies of the lender.
Firstly, the biggest benefit of paying your loan early is that you get free from debt faster. Additionally, you get to enjoy the following benefits:
- You save money as the interest payments get greatly reduced.
- Your CIBIL rating improves and you become an attractive borrower in the eyes of the lenders and the credit rating agencies.
The RBI has directed all banks not to charge a pre-payment fee for closing the loan early. But this directive is only applicable to loans taken on floating interest rates.
Most personal loans are offered on a fixed rate basis, that means the RBI rule is not applicable in case of personal loans. However, there are some personal loan lenders that do not charge for pre-payment.
Most banks and NBFCs charge between 2 to 4% for pre-payment of the loan. They use pre-payment calculator to derive at the pre-closure amount that includes the pre-payment charge. You can visit the website of your lender to find the pre-payment charges using their calculators. The details like tenure of the loan, number of EMIs paid, interest rate, total loan amount, pre-closure charges if any, and details of earlier payments if any, the month of foreclosure, etc. need to be inserted in the calculator to come up with the exact pre-closure amount.
There are some banks and financial institutions that do not charge a pre-payment fee for early loan closure. To find out whether you can pre-pay your loan without extra charges, get in touch with your loan provider and then decide whether it is beneficial to pre-pay the loan.
There are 3 ways you can make personal loan repayment. They are:
- Regular closure – Paying EMIs over the agreed loan tenure
- Pre-closure/Foreclosure – Paying the outstanding balance in full before the loan tenure ends
- Part-payment – Paying more than the regular EMIs to cover most, but not the entire outstanding balance
The best way to get out of debt faster is to pre-pay it in full. If it’s not possible, making part pre-payments is a sensible way to get out of debt faster. So, the best way to pre-pay your personal loan depends on your financial capability.
Generally, the personal loans repayment tenure can range from 2 months to 5 years. So, every personal loan lender offers the loan for a minimum and a maximum period, which varies from lender to lender. Some lenders may have a lock-in period clause for pre-payments. For most banks, it is mandatory to pay EMIs for at least 6 to 12 months before preclosing the personal loan. It is always better to contact your lender to check the pre-closure charges for personal loan before you decide to pre-close.
Note: As of now, MoneyTap offers only personal loan full pre-payment option.
Note: Personal loan pre-payment option is not available for DMI approved customers.