5 Personal Loan Prepaying Benefits You Need to Know

Personal loans have become a popular financing option, especially in emergencies or unforeseen expenses that often strike when you least expect them. With minimal paperwork and quick processing, personal loans in India are a go-to solution for many. But did you know that prepaying your personal loan can be incredibly beneficial? Let's dive into the world of prepayment on personal loans and explore its key benefits.

What is Loan Prepayment?

Loan prepayment means paying off your loan before the end of its tenure, either in full or in part. Many financial institutions offer this option, allowing you to reduce or eliminate your debt ahead of schedule.

When you prepay your loan, you essentially pay more than the monthly instalment or the entire outstanding loan amount before the due date. That can lead to loan foreclosure, where the loan account is closed before its maturity. Now, let's explore the benefits of prepaying your personal loan and why it might be a smart financial move.

Loan Prepayment Benefits

1. Go Debt-Free Sooner

One of the most compelling reasons to prepay your personal loan is the opportunity to become debt-free sooner. Personal loan EMIs can take a significant chunk out of your monthly savings. By prepaying your loan, you can save on interest payments and free up more disposable income.

Imagine the peace of mind that comes with knowing you no longer have monthly loan payments. You can lead a stress-free life and achieve financial independence much faster.

2. Improve Your Credit Score

Your credit score is crucial when it comes to borrowing money in the future. Prepaying your personal loan can positively impact your credit score. Outstanding loans are linked to your credit score, and paying off a loan earlier can boost your score.

A higher credit score makes you more attractive to lenders, increasing your chances of securing another loan with favourable terms. A credit score above 750 and a spotless credit report can open doors to better financial opportunities.

Also Read: How to get urgent Personal Loans for Bad Credit score?

3. Save on Interest Payments

Prepaying your personal loan can help you save significantly on interest payments. While there is usually a nominal prepayment fee, this fee is often much lower than the total interest you would pay over the loan tenure.

With no more monthly interest obligations, you can redirect that money towards other financial goals, such as investments in fixed deposits or mutual funds. That can further enhance your financial stability and growth.

4. Reduce Your Debt Burden

If you can't prepay the entire loan amount in one go, consider making a partial prepayment. Partial prepayment reduces your debt burden and the total interest payable on the outstanding loan amount.

It's a smart move to make partial prepayments in the early years of your loan tenure. This can significantly reduce the overall cost of the loan and help you manage your finances better.

5. Flexible Financial Planning

Prepaying your personal loan gives you more flexibility in your financial planning. With fewer monthly obligations, you can allocate your resources more effectively towards other important goals, such as savings, investments, or major purchases.

Additionally, being free from debt can provide a sense of financial security and stability, allowing you to plan for the future with greater confidence.

Understanding Prepayment Fees

While prepaying your personal loan offers many benefits, it's essential to understand the associated prepayment charges. Most banks and non-banking financial companies (NBFCs) charge a fee for prepayment to compensate for the loss of potential interest income.

These fees vary from one lender to another and depend on the loan tenure completed. Typically, prepayment charges range from 4% to 5% of the outstanding loan amount. Some banks may waive these fees after a certain period, such as three years.

Steps to Prepay Your Personal Loan

If you decide to prepay your loan, here are the steps you should follow:

• Contact Your Lender: Reach out to the bank or NBFC from whom you availed the loan.
• Submit the Prepayment Request: Submit a prepayment request along with the required documents and the prepayment amount.
• Verification: The lender will verify the details and process your request.
• Receive NOC: Once the prepayment is processed, ensure you receive a No Objection Certificate (NOC) and other relevant documents to confirm the pre-closure of the personal loan.

How to Navigate Prepayment Charges on Personal Loans?

Dealing with personal loan prepayment charges can be tricky, but don't worry! Start by comparing the interest rates with the prepayment charges. Suppose a package offers low prepayment fees but a high interest rate. In that case, opting for a lower interest rate is usually better.

Use a prepayment calculator to see the potential savings you could gain from lower prepayment charges. Doing this will help you monetize the advantages and make an informed decision. Consider your current financial standing and future income prospects.

If you expect a significant rise in income, prepayment charges should be a key factor in your decision. If not, you might be better off choosing a package with lower interest rates.

Also Read: Interest Rate on a Personal Loan in India

Final Thought

Prepaying your personal loan can be a wise financial decision. It offers numerous benefits, such as becoming debt-free sooner, improving your credit score, saving on interest payments, reducing your debt burden, and providing flexibility in financial planning.

However, it's crucial to consider the prepayment charges and calculate the actual benefit before proceeding. By making informed decisions, you can leverage the benefits of prepayment and achieve greater financial stability and freedom.

Whether you opt for full preclosure or part prepayment of a personal loan, understanding the process and its advantages can help you make the best financial choice for your future.