Is personal loan prepayment a good idea? Here’s what you need to consider
Personal loan prepayment: While prepaying loans can lead to savings, borrowers must examine prepayment fees outlined in loan agreements. Personal loans are unsecured and require attention to interest rates and payment terms to ensure timely repayment and financial health.
Personal loans are opted for by those who want funds for diverse needs without the need for collateral. While getting a personal loan, borrowers mostly look for interest rates, EMI payments, and the tenure of the loan to estimate how it would impact their finances. Keeping these points in mind helps the borrowers fulfil one of the most significant responsibilities, which is paying the loan on time.
In order to save interest costs and EMI payments over time, some borrowers prefer to pay their loan amount before the due date.
What is loan prepayment?
When you pay off your part or the entire loan amount early or before the due date, it is called loan pre-payment. However, some banks may levy a prepayment fee over clearing your dues early. This fee is mentioned in the loan agreement.
Types of prepayment
- Partial prepayment: If you pay a part of your loan amount early, it is called partial prepayment of the loan. Borrowers mostly opt for this option when they have borrowed a large amount.
- Full pre-payment: If you fully repay the loan amount before the due date, it is referred to as full pre-payment of the loan. All personal loans have a lock-in period. Repayment after this period and before the due date will be called pre-payment of the loan.
Paying the loans before due dates will help save interest costs and lower EMIs; however, this is not always a good idea.
Drawbacks of prepayment
- Prepayment fees: Several banks charge a fee on the prepayment of a loan. The Reserve Bank of India (RBI) has mandated that banks will not charge prepayment fees on loans provided in floating interest rates. There is no restriction on prepayment fees for loans provided at fixed interest rates. The prepayment charge may differ from bank to bank. Some banks may even not allow partial prepayment of loans till the mandated number of EMIs are paid. Banks mostly charge fees as prepayment means loss of revenue for them through interest and EMIs.
- Lack of finances: To pay loans early, you may have to arrange funds. This might strain your liquidity and finances. You may face difficulty in arranging funds for emergency situations such as medical expenses, loss of stable income or job, missing bills etc. This will force you to take additional loans, adding pressure to your financial situation. Therefore, you must opt for prepayment of loans only if you have enough funds to meet emergency expenses.
Check out the prepayment charges of some major banks
| Bank | Pre-payment charges | Foreclosure charges |
|---|---|---|
| State Bank of India | For SBI Xpress Credit, 3% fees on prepaid amounts.
For the SBI Pension Loan, there is a 3% fee on the prepaid amount. | Nil |
| HDFC Bank | A 4% fee on the principal outstanding amount for up to 24 months. A 3% fee on the principal outstanding amount for 24 to 36 months. A 2% fee on the principal outstanding amount after 36 months.
| A 4% fee on the principal outstanding amount for up to 24 months. A 3% fee on the principal outstanding amount for 24 to 36 months. A 2% fee on the principal outstanding amount after 36 months. |
| ICICI Bank | A 3% fee on the outstanding principal amount. No fees after the payment of 12 EMIs.
| A 3% fee on the outstanding principal amount. No fees after the payment of 12 EMIs. |
| Axis Bank | No charges after 12 months for loans above ₹10 lakh. | No charges after 12 months for loans above ₹10 lakh. |
| Kotak Mahindra Bank | For the loans disbursed after February 1, 2020, partial prepayment is permitted for around 20% every year, after a lock-in period of 12 months | A 4% charge of principal outstanding along with GST for 1 to 3 years.
A 2% charge of principal outstanding and GST after 3 years.
|
(Source: Paisabazaar)
In conclusion, prepayment of a loan may seem like a suitable option to save some money on your loan. However, before choosing this option, check your loan agreement for prepayment charges and repay the loan early only if you are able to save some money on your loan.
(Note: Personal loan interest rates and other provisions keep changing with time. Readers are advised to check the relevant bank's official website for the latest updates.)
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