Pros and cons of personal loan pre-payment
Personal Loans is the most widely used financial product be it for travel, festival celebrations, buying gadgets or wedding preparations. In spite of its convenience, it also is one of the costliest. So, you have to optimise its benefits while reducing its costs. How do you do that? Enter pre-payment.
What is pre-payment? Pre-payment is when you pay off your outstanding loan amount entirely or partially before the due date defined in the loan agreement. You may find it liberating to pay off your debt before the deadline; but, is it always a smart and economical option?Here are the merits and demerits of early closure of a personal loan that you should consider before making a decision:
1. Pros of Pre-payment
a) Benefits of Full Pre-payment
A personal loan usually comes with about one year of lock-in period after which you can pre-pay the total outstanding amount, saving a good amount on the interest. However, you will have to pay interest on pre-payment too. The rates may vary from bank to bank; ranging from 3% to 5%. If you research well, you can find some public or even private banks that don’t charge you a penalty on pre-payment of personal loans. So, you can have the benefit of immediate money in the case of a cash emergency, without it burning a hole in your pocket in terms of high interest rates.
b) Benefits of Part Payment
If you have ready cash which is not adequate to pay the entire outstanding principal amount, but can lessen your loan burden to a large extent, then you can choose a part payment option. It can bring down the unpaid principal amount which will ultimately bring down your EMIs as well as the total interest. If you opt for this option, make sure you make a part payment as early as possible to save more by minimising your interest.
c) Benefits of going Debt-Free
Most of the borrowers will prefer the pre-payment option, to lead a debt-free life. The financial implications apart, it will relieve you the stress of having to make payments each month for many years to come.
2. Cons of Pre-payment
a) Penalty on Pre-payment of a Personal Loan
Pre-payment penalties may vary across banks. Certain banks may charge these penalties at a flat rate or as an interest for a certain number of months.
b) Losing access to huge amounts at once
It would be smarter to invest the money that you are using for pre-paying your loan in a financial product that offers better rates of return. You can always pay in instalments and use the money in hand to buy something useful instead.
Therefore, before you make a decision to partially pre-pay or fore-close a loan, you should compare the additional interest out-go to the pre-payment or foreclosure charges and make a wise choice!
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