Is Personal Loan Prepayment a Good Idea?

Several individuals avail of personal finance to meet emergency fund requirements. Such loans are available without any collateral, which makes these popular. Furthermore, the borrowed amount may be used for any legal purpose, thereby giving you flexibility.

It is most likely that you may avail of this loan with the intention of repaying it before the end of the tenure. Compared to other loans like home or auto, the interest rates on personal finance are higher.

There are several benefits of prepaying part or the entire loan amount before its tenure. Generally, you may choose a longer tenure to reduce the equated monthly installment (EMI). However, the interest paid over a longer duration is higher and, therefore, repaying earlier is beneficial.

  1. Lower the EMI

If you have funds available, it is recommended you use them to repay the outstanding personal loan. This will enable you to lower the EMI and also ensure the amount is repaid in a shorter period of time. When you repay the loan faster, you are able to save a significant amount for the longer duration.

2. Pre-closure penalty

Financial institutions may levy a certain penalty if you repay the personal loan before the end of its duration. It is recommended you check the penalty and make an informed decision. In most instances, you will still be able to save money when you prepay even after paying the pre-closure penalty. This is because the personal loan interest rates are higher than secured credit facilities, such as home or auto loans.

3. Improve credit score

Your credit score is directly related to the amount of your outstanding debt liabilities. When you prepay the loan, it is immediately reflected in your credit score. Repaying the money before the end of the loan tenure positively affects your credit score. A higher score will ensure lenders perceive you as low-risk in the future when you apply for another loan.

You may either prepay the entire amount or some part of the outstanding principal. The following will help you understand the advantages of repaying either part or full loan amount before its tenure.

4. Full prepayment

When you prepay the entire loan amount before the end of the duration, you are able to save a significant amount towards the interest payout. Furthermore, the interest savings are higher when you prepay during the initial years of the loan duration. Most lenders have a minimum lock-in period during which you are not allowed to prepay the loan amount. It is advisable that if you have extra money during the lock-in period, you invest in high-return instruments. The accumulated amount may then be used to repay the loan amount after the end of the lock-in period.

5.Partial prepayment

You may receive an annual bonus or some of your other investments may mature during the loan duration. This amount may not be equal to the entire outstanding loan amount. However, it is beneficial to use the same to repay the loan. Partial prepayment reduces the outstanding principal, which decreases your EMI. Therefore, using the funds to repay the loan will help you save a huge amount in the long run.

The old saying “borrow less and repay early” is still applicable. Moreover, when you avail of a personal loan online, you are able to enjoy certain special offers. However, it is still debt and repaying it at the earliest is advisable to ensure your outflows are the least.

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