Things To Ponder If You Want to Prepay Your Personal Loan

Things To Ponder If You Want to Prepay Your Personal Loan
While the interest rate on personal loans is usually much higher than that of other types of loans, like
business loans, home loans, etc. they are an excellent financial aid during financial emergencies.
Borrowers are also allowed to prepay their ​personal loans in full or partial before the actual tenure of
the loan. However, this might not always be an economical option, and thus, it is very important to
consider several factors before taking such a decision.
What is personal loan pre-payment?
When a personal loan borrower pays off the loan entirely or in parts before the defined tenure, then
it is called as personal loan pre-payment.
When looking for a pre-payment, make sure that you consider some factors mentioned below-
● Pre-payment Penalty
Penalties on loan pre-payment vary between financial institutions. The penalty is usually based
on a flat rate or as the interest of a few months. Even if the pre-payment penalty is mentioned in
the loan agreement, the borrower should compare the penalty against the interest he/she will
save by prepaying the loan as in many instances; the penalty is higher than the amount one can
save on interest by prepaying. Usually, the pre-payment penalty is between 2-5% on
pre-payment.
● Freezing Period
Also, there are stipulated timelines before one can pre-pay their ​easy personal loans​. Most of the
institutions don’t allow you to pay the personal loan within the first six months of taking the
loan. To ensure that these provisions are capitalized, the borrower should read the loan
agreement carefully and get all their queries answered by the borrower.
When should you prepay?
It is important to know when you should
prepay the loan amount. Check with the
bank during quarter or financial year
endings. To write off loans, banks may
sometimes negotiate on the pre-payment
penalty, which usually happens during this
period. Also, pre-payment is ideally
beneficial when the personal loan is not
more than a year old and there is still
considerable amount left to pay.
Actual Savings
Borrowers often feel that as they have
paid some EMI’s already, the interest
component would be much lower and prepaying the loan doesn’t make a lot of financial sense.

However, the borrower actually pays the same rate of interest on the principal amount which is
unpaid as calculation of interest is done with the help of reducing balance method. As a result, rather
than loan tenure, borrowers should consider prevailing ​interest rate on personal loan while prepaying
the loan.
There are several factors, like how many EMI’s one has already paid, interest rate, pre-payment
penalty which allows the borrower to decide whether they should prepay the loan or continue the
EMI’s. Analyze all these elements before taking the decision.
Reference:
http://u.wn.com/2016/12/22/What_You_Need_to_Know_if_You_Want_to_Prepay_Your_Personal_Lo_1/