A personal loan is the first thing that you usually think of availing in times of an emergency. Personal loan eligibility criteria are simple, and that is the reason these loans are available easily. Since they are available at ease, the interest rates of personal loans are higher than any secured or unsecured loan.
Generally, you always pay attention to the interest rate, monthly instalments and loan tenor in a loan agreement.
But, you often overlook the foreclosure charges and personal loan prepayment charges. There are certain aspects of a prepayment of a personal loan that can affect your finances.
Read on to know the things to consider while making a personal loan prepayment.
Check these factors before making a personal loan prepayment
- Prepayment penalties and actual savings
If you make a prepayment of a loan, it will reduce the interest amount of the lender. To make up for the potential loss of interest income, lenders impose a penalty on the borrower for prepayment of the loan. The personal loan prepayment charges vary from one lender to another. You should always compare your prepayment charges with the interest savings you would make if you make a prepayment. You can also use a prepayment personal loan calculator available online on the website of your lender to know your actual savings.
- Interest rates of other debts
The prevailing interest rates in the financial market are an important consideration. If you already have debts like credit cards and other existing loans, you should check the interest rates payable on them. If the interest payable on them is higher than your personal loan interest, you should consider paying them before prepaying your personal loan.
- CIBIL score
Paying off a debt always improves your CIBIL score. Part-payment does not affect your CIBIL score. But, full payment of a loan in advance can increase your credit score. If you are thinking of prepayment of a personal loan, you should check your CIBIL score first. If you have a low CIBIL score, you should go ahead with your decision of prepayment.
- Terms and conditions of the loan agreement
You should go through your loan agreement before making any decision about prepayment of a personal loan. Many lenders do not levy any foreclosure or prepayment charges. But, they come with certain other terms and conditions. Many lenders impose restrictions on the number of times you can make part-payment and the amount under it. You should check these clauses in your loan agreement before making any prepayment.
- Lock-in period
Another aspect that you must keep in mind is the lock-in period. Most of the lenders have a lock-in period only after which you can pay the entire outstanding loan amount. Since the interest is being paid on the outstanding amount, you can save money if the principal gets reduced. Prepayment of a personal loan is beneficial if done soon after the lock-in period ends.
- Tax Implications
Interest paid on a personal loan availed for business purpose, buying/constructing a real estate property and buying any other asset is eligible for tax exemption.
Hence, you should consider a prepayment of a personal loan only if the interest saved on prepayment is more than the tax savings. You should do all the calculations before arriving at any decision.
People always like to pay off debt as early as possible and free themselves.
But, the prepayment of a personal loan should be done only after considering all prospects and consequences.
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