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.
Pre-payment or early repayment is a payment you make towards your loan repayment before the completion of your loan tenure.
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.
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.
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.
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:
With the help of the same example, let’s understand how personal loan full pre-payment is beneficial.
There are several benefits to pre-paying your personal loan:
Since you no longer have to budget for EMIs, paying your personal loan off early will save you hundreds, even thousands of rupees in interest over the long run.
You are in a better financial position with access to more money at your disposal. You can then decide to save or redirect the funds towards other goals.
Personal loan prepayment makes you an attractive borrower and improves your credit score. Your debt-to-income ratio becomes low and lenders find you qualified for better loan terms and attractive interest rates if you ever decide to take a loan again.
Getting rid of debt is a rewarding experience. You sleep better as you are not worried about keeping aside money to pay off your EMI amount every month.
MoneyTap’s personal loan foreclosure is a manual process as stated below:
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, here are the contact details:
For RBL approved customers, here are a few things you may want to take a note of:
A prepayment fee is exactly what it sounds like – a charge for paying your debt before your loan tenure ends. The fee amount is usually a certain percentage of the total unpaid principal balance at that time. Some lenders may instead charge a fixed amount.
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.
There are 3 ways you can make personal loan repayment. They are:
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.
Personal loan lenders earn money from the interest they charge you on your loan amount till you complete your loan tenure. When you decide to pay the loan much before the due date, they lose on the interest they would have otherwise earned had you planned to stick to the loan tenure.
By charging a prepayment fee, two things can possibly happen – either you get discouraged from paying the loan early, so they earn the full amount of interest or you pay the penalty which makes up for some of the financial loss they incurred because you paid early.
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.
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 choose to pre-pay when you are in the early stages of your personal loan or once your lock-in period ends.
For pre-paying (in full or part), if your bank charges you a fee, then weigh which option is better – paying the penalty or pre-paying to save money on interest. Then decide your next move.
If you have decided on pre-closing your personal loan, these are the steps you need to follow.
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% to 5% 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.
Even though prepayment is advisable under normal circumstances, a home loan interest is tax-deductible. This makes it a cheap loan, which means you will do better for yourself if you invest that money somewhere to get a better return than repaying the home loan.
However, it is recommended that repaying the loan when you can is ideal. There are two reasons for this:
It is not uncommon for people to get caught in the conflict between prepayment fees and interest rate. Packages with lower prepayment fees are appealing but if they include a higher interest rate, steer clear of them. Unless the customer is expecting an upswing on the income, it is advisable to pick a package that has a lower interest rate even though the prepayment fee is higher.
Even when the prepayment fees doesn’t really concern you much, it is a safe practice to take into account the financial needs that are on the horizon. If you think that you will require the money to meet the financial goals such as paying for your daughter’s education or paying for the treatment of an elder in your family, there’s absolutely no harm in delaying the payment.
Your prepayment decision must be based on the prevailing interest rate and availability of cash with you. The right time or wrong time to pre-close the loan varies on individual circumstances. It depends on current income status, any expected upsurge in the income or emergencies.
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
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:
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.
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