Pros and Cons of Personal Loan Prepayment

Online loan has made borrowing much easier, but what about the repayment? Well, when you avail a personal loan, many lenders offer you high flexibility in terms of repayment. With options like part-payments and foreclosure, repaying a personal loan is much simpler.

When you apply for a loan through a money loan app, you must make sure to read the foreclosure terms. Many lenders charge a nominal foreclosure charge on the pending principal. In addition to this, you also have to pay GST on that charge. This charge often differs from lender to lender. That’s why you must read the terms and conditions before accepting a loan.

Read on to know more about the prepayment of a loan, and its pros and cons.

What is personal loan prepayment and how does it work?

Personal loan prepayment refers to the facility that allows you to repay your online loan liability in part or in full at any time before the tenure ends. Prepayment is available under two repayment structures, known as part-prepayment and foreclosure.

Under the part-prepayment facility, you repay only a part of the total outstanding loan through a lump sum payment. Foreclosure leads to complete repayment of the loan liability and closure of the loan account.

The rules of prepayment vary from one lender to another. You are allowed to opt for either of the prepayment facilities only after having met a certain number of EMI payments. Also, when prepaying your online loan, you have to bear a prepayment fee as levied by your lender. This is usually set nominally and chargeable on the outstanding loan principal.

However, the lender cannot levy any prepayment charges if you have opted for a floating interest rate. Hence, it is very important to understand the prepayment clauses in detail to make an informed borrowing decision.

Pros of personal loan prepayment

  1. Helps save on total interest liability

When you make a prepayment, whether opting for part-prepayment or foreclosure of your loan, it leads to a reduction in the total tenure for repayment. As a result, the total amount of interest accrued reduces too. Thus, reducing the total loan liability and making the loan affordable.

  1. Impacts the credit score positively

Prepayment often leads to early repayment as against the schedule initially agreed upon. It thus etches a positive mark on your credit history, thus helping improve your credit score over time.

  1. Helps improve your borrowing capacity

As prepayment leads to an early release of loan liability, it replenishes your repayment capacity. Your borrowing capacity thus improves and you become eligible to avail new loans.

  1. Reduces unsecured loan mix in your credit portfolio

By repaying your personal loan before the decided tenure, you also reduce the share of unsecured loans in your total credit portfolio, thus bringing down the overall risk related to your borrowing profile.

Cons of personal loan prepayment

  1. Applicable charges may erode the interest savings

As lenders levy fees on prepayment facilities availed, the final savings can only be assessed once such fees have been adjusted into the initial interest savings computed. Thus, it is important to calculate all these charges against the interest saved before opting for prepayment.

Also, prepayment of the loan is beneficial only during the initial tenure of your loan. It does not make any significant effect during the latter half of your loan tenure. Hence, you must consider a lot of aspects before choosing the prepayment option.

  1. Negative impact on individual liquidity

Prepayment requires the borrower to make a lump sum payment. It thus reduces their overall liquidity and may leave them vulnerable to new emergencies. Making a pre-payment makes sense only when you have received a lump-sum amount in incentive or bonus.

Conclusion

With this detailed look at the advantages and disadvantages related to the prepayment of your online loan, you can now better decide on whether to avail the facility. It is crucial that you assess your prepayment decision based on the cost-saving calculations.

It is easy to assess whether you are optimising your prepayment decision or not with the help of a prepayment calculator. A prepayment calculator provides a detailed breakdown of how much you end up saving based on the timing of the prepayment selected. The amortization schedule available with EMI calculators on money loan apps also helps time your prepayment decision well for maximum savings.