Personal Loan: Prepayment, Part-prepayment and Its Benefits

Personal Loan: Prepayment, Part-prepayment and Its Benefits

Being unsecured in nature and with no end usage restriction, personal loans have garnered immense favour among Indian borrowers. However, personal loan interest rates are also higher than most other loans as lenders do not have any security to fall back on in case you default. Therefore, it is important to make regular repayments towards a personal loan to avoid penal charges and keep the total loan cost to a minimum. While you do this, one way by which you can reduce your interest outgo further is by paying a portion of your principal early.

To understand how this works, read on to learn about part-prepayments, prepayments, and their benefits.

Prepayment of Personal Loan

Most lenders allow you to prepay your personal loans before the end of the tenor. This involves repaying the entire principal and not just a part of it and is also called a foreclosure. Not only does a prepayment result in substantial interest savings, but it also helps you get debt-free sooner. Ideally, you should fully prepay your personal loan during the first few years of servicing the debt. This is because the initial EMIs comprise primarily the interest and so, prepaying your loan early reduces your overall interest burden substantially.

Another benefit of prepaying your personal loan is that you put to good use the surplus finances you have instead of keeping them idle or earning low returns on the same. Finally, though a prepayment of a personal loan doesn’t impact your credit score immediately, it does boost your score in the long run.

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Part-Prepayment of Personal Loan

In the event that you don’t have enough funds to prepay your personal loan entirely, you can choose to make multiple part-prepayments. This way, you can prepay your personal loan every time you earn an additional income or have a windfall gain.

When you make a part-payment of your personal loan, you pay off a portion of your principal over and above normal EMIs. Usually lenders require you to make a part-prepayment of an amount that is greater than 1 EMI. Doing this brings down your subsequent EMIs and your total interest outgo.

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Ideally, you should make a part-prepayment when you have a substantial amount at hand as your gains should be more than the charges involved. You can make part-prepayments multiple times, as and when you find yourself with extra funds. Nevertheless, while it reduces the interest you incur, a part-prepayment of a personal loan has absolutely no impact on your credit score.

Conditions To Making Prepayment and Part-Prepayments

  • Lenders usually have a lock-in period of a year when it comes to making a prepayment of a personal loan. For instance, you may be allowed to prepay your personal loan only after paying at least 12 EMIs.
  • As is with part-prepayments, lenders tend to have a lock in period of around 6 to 12 months, before which you cannot make part-prepayments on your personal loan. Further, there may also be a limit on part-prepayment amount.

Prepayment And Part-Prepayment Charges

Though prepayment and part-prepayments help you get debt-free sooner, they entail certain costs, which in turn depend on the type of personal loan interest rate your loan carries. The Reserve Bank of India has directed lenders to not charge any fees for the prepayment of floating interest personal loans. However, most personal loans have a fixed interest rate, which means that you will probably have to pay certain fees for prepaying your personal loan, except when the lender doesn’t levy anything for this convenience.

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When it comes to part-prepayment, both fixed and floating interest rate personal loans have charges, which vary across lenders. Thus, it is important to do a cost-benefit analysis before you decide to make a part-prepayment towards your personal loan. Remember that your savings must exceed the charges that you incur. Only then it will make sense to close your loan, whether entirely or in a staggered manner.

To keep your cost to a minimum, apply for a personal loan with a lender who has nil or minimum fees for prepayment and part-prepayment. Bajaj Finserv is one such lender that has

With a Bajaj Finserv Personal Loan, you can access a high-value sanction of up to Rs.25 lakh on cost-effective terms and repay it over a flexible tenor ranging up to 60 months. All you have to do is meet the simple personal loan eligibility criteria put forth by the lender. Once you do this, produce the personal loan documents to initiate the application process. To offer convenience, Bajaj Finserv allows you to apply for this attractive personal loan online or by visiting your nearest branch. However, be sure to check your pre-approved personal loan offer first to enjoy one-step, hassle-free approval via a customised deal.

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