Loan Prepayment : If you are thinking of paying off your loan early, it’s important to reconsider this decision. Don’t make the decision of loan prepayment in a hurry, as it may cause you more harm than good.
When you do the calculation, you might find that there is no significant benefit, and most of the time, it could actually lead to a loss. However, if you have already decided to go ahead with loan prepayment, it is important to understand when it can be beneficial for you.
This Option is Provided by the Bank
One of the loans that are easily available is the personal loan, but it comes with a higher interest rate compared to other loans. If you don’t want to pay high interest on a personal loan, the bank provides you with an option to pay off the loan early, and this is called loan prepayment.
Financial Loss from Loan Prepayment
When you do a loan prepayment, the bank may charge you foreclosure fees, which can cause you to suffer financially. It’s important to calculate the total cost before making the prepayment. You should check whether paying off the loan regularly or paying the foreclosure charge will save you more money. Only then will the loan prepayment be beneficial; otherwise, it will lead to a loss.
What Happens to the Interest on EMIs?
Banks or NBFCs typically charge 1% to 5% of the outstanding loan amount as a pre-closure charge. While there are charges, you will also get relief from the interest on EMIs. If your outstanding loan amount is high, you may get more benefit from prepayment.
Effect of Loan Prepayment on Your Credit Score
When you repay the loan earlier than scheduled, it typically helps in improving your credit score. However, the rules may vary from bank to bank. If you are regularly paying your EMIs as scheduled, your credit score will improve over time. One advantage of loan prepayment is that it shows your ability to repay the loan, making it easier for you to get loans in the future.
When is the Best Time for Loan Prepayment?
The timing of prepayment is crucial. It greatly depends on whether you will benefit or incur a loss. If you have already paid most of the loan and are considering prepayment towards the end, you may not get much benefit, and you might face foreclosure charges unnecessarily. Loan prepayment will be more beneficial when half or more of the EMIs are still pending, as this way you can save on interest charges as well.
Conclusion
prepayment can be a good option, but it is essential to understand the charges and interest involved. Do not rush into prepayment without fully considering all factors. Ensure that you evaluate whether you will save more by making regular payments or by paying the foreclosure charges. Loan prepayment will benefit you the most when you still have a significant portion of the loan to pay off. By doing the calculations properly, you can decide whether it will be beneficial or not.
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