4 MinsFeb 08, 2023
A personal loan is a type of unsecured loan that can be used for a variety of purposes, such as debt consolidation, home renovation or financing a vacation. The loan is typically repaid in monthly instalments over a fixed period, at a fixed interest rate.
However, you have the option to prepay your personal loan, which means paying off the remaining balance of the loan before the scheduled repayment period is over. The decision to prepay a personal loan can have both positive and negative consequences, depending on your financial situation and goals. In this article, we will discuss the pros and cons of opting for personal loan prepayment.
What is Prepayment?
Prepayment is the act of paying off a loan before the scheduled repayment period is over. When you make a prepayment on a personal loan, you are paying off some or all of the remaining balance of the loan. This can be done in a lump sum or by making extra payments in addition to the regular monthly payments.
Prepayment clauses are the terms and conditions in a loan agreement that pertain to the act of paying off a loan before the scheduled repayment period is over. These clauses can vary depending on the lender and the type of loan. Some common prepayment clauses include:
1. Prepayment Penalty: Many lenders charge a fee for prepayment, called a prepayment penalty. This fee can be a percentage of the remaining loan balance or a flat fee. The purpose of this fee is to compensate the lender for the interest they would have earned had the loan been fully repaid on schedule.
2. Partial Prepayment Restrictions: Some lenders may have restrictions on the amount of the loan that can be prepaid. For example, a lender may only allow you to prepay a certain percentage of the loan balance per year.
3. Prepayment Notice: Some lenders may require you to give notice before making a prepayment. For example, a lender may require you to give a 30-day notice before making a prepayment.
4. Prepayment Fees: Some lenders may charge a fee for processing a prepayment, regardless of whether the loan is prepaid in full or in part.
5. Lock-in period: Some lenders may have a lock-in period. This means that you cannot repay the loan before the lock-in period is over.
It is always advisable to go through the terms and conditions and check the fees associated with prepayment before making a decision. It is also important to check with the lender about the prepayment penalties, if any, and the process of making prepayments.
Also Read: [How to Choose a Personal Loan Interest Rate That Fits Your Pocket]
Advantages of Loan Prepayment
1. Reduction in overall interest cost: By prepaying a personal loan, you can reduce the overall interest cost of the loan, as the unpaid interest component decreases.
2. Shorter loan tenure: Prepayment can reduce the loan tenure as it will bring down the outstanding principal amount.
3. Increased savings: The money saved from the reduction in interest cost and shorter loan tenure can be utilised for other investments.
4. Improved credit score: Personal loan prepayment can help in improving credit score as it shows responsible loan repayment behaviour.
Disadvantages of Loan Prepayment
1. Prepayment charges: Many banks and financial institutions charge a fee for personal loan prepayment. This can increase the overall cost of the loan.
2. Loss of liquidity: Prepaying a personal loan can lead to a loss of liquidity as the funds get locked in the loan repayment.
Personal loan prepayment can be a good option if you want to reduce the overall interest cost, shorten the loan tenure and improve your credit score. Axis Bank personal loans provide the facility of prepayment. We recommend you go through the terms and conditions and check the fees associated with prepayment before making a decision.
Want to calculate the monthly EMI on a personal loan? Check out Axis Bank's interactive personal loan EMI calculator & interest rates on personal loan.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.