At a time when getting a personal loan has become amazingly easy and quick, it has become easier for people to arrange money at short notice. Since a personal loan is unsecured, the money is directly credited to the borrower’s bank account. This means they can use it in any form, from managing medical expenses to spending holidays with family, buying a new appliance, paying off debt, etc. Many banks and NBFCs are available today that offer great deals on personal loans. Whether you have already taken a personal loan or are planning to take one, you must know each & everything about it. One of them is pre-closure. In this post, you will get to see whether you should pre-close a personal loan or not. Is it advantageous or not?
What is Loan Pre-Closure?
Simply put, pre-closing a loan means paying off the loan amount ahead of the repayment schedule. It means the borrower pays the remaining loan amount as a lump sum instead of spending it in monthly installments. Most people think paying the remaining loan amount in one go is reasonable rather than paying the same in small installments at higher interest rates. Let’s find out more about this below.
Should I Pre-Close a Personal Loan?
Out rightly, it is a beautiful idea. This way, a borrower can save on interest rates and repayment hassles and, most importantly, get rid of the burden of obtaining a loan. According to experts, one should decide to pre-close a personal loan if he finds himself in a stable and healthy financial condition. This is because one may encounter tough financial times, so he would regret pre-closing the personal loan.
So, the decision to pre-close a personal loan should always be taken by considering all factors. For example, if you have increased your income and received money from another source, you can go with pre-closing the loan. However, ensure your financial condition is safe and sound before you do this.
Benefits of Pre-Closing a Personal Loan
Let’s look at the major benefits of pre-closing a personal loan.
- Quick improvement in CIBIL score
- Save on interest by paying the remaining amount in one go
- Better use of available funds
- Be debt-free
- Utilize the saved money on other things
What is the Right Time to Pre-Close a Personal Loan?
Remember the following two things if you are looking for the right time to pre-close a personal loan.
- If a loan has a five-year term, interest will often make up most of your first 1-2 years’ worth of early monthly installments, or EMI. Thus, the interest amount continues to decrease as the loan duration draws to a close. Consequently, pre-closing the loan is the ideal option in this case, pending your funds availability and the bank’s policies.
- Considering your tax advantages is something else to bear in mind. Pre-closure could be wise if your interest payments no longer provide tax benefits.
Knowing the charges associated with the pre-closure of a loan is something every borrower should know. Banks and NBFCs charge a bit extra when a borrower wants to close a personal loan ahead of schedule. The pre-closure charges for personal loans vary between 3 and 5%. If you decide to pay early, you can save on paying higher interest rates.
Calculation of Personal Loan Pre-Closure Charges
Each financial organization has its own charges to make way for a personal loan foreclosure. Pre-closing a loan is permitted by most financial institutions. However, there might be some restrictions, such as:
- A loan’s option to foreclose is only given once many EMIs have been paid back.
- Prepayment carries a surcharge that, given the exact amount owed before foreclosure, can range from 1% to 5% or more.
- Numerous online foreclosure calculators are available to determine the required penalty amount.
If imposed, the foreclosure charges represent a particular portion (between 3% and 5%) of the remaining loan balance. The borrower must need to keep in mind that different lenders may have different percentages.
How to Pre-Close a Personal Loan?
The pre-closure of a personal loan has become super easy these days. The borrowers can follow specific steps to foreclose their loans.
- To check pre-closing eligibility, borrowers must first inquire with their lender about the possibility of foreclosure and any associated information, such as the amount of EMIs that must be paid and the foreclosure penalty.
- They must then file for loan foreclosure through the lending institution and submit the required paperwork if all eligibility requirements are satisfied.
- The lender will decide the next course of action after reviewing the application. Usually, applicants are given a payment ID or another method to make the foreclosure payment.
A No Objection Certificate, or NOC, must be fetched from the lending institution as evidence that the outstanding loan amount has been settled after all fees have been paid and the loan has been foreclosed. Additionally, this guarantees that the lender has no further legal claim to the provided papers.
Borrowers should ensure that the banks have appropriately updated their loan information as soon as possible to prevent possible conflicts at a later stage, as loan foreclosure affects the borrower’s CIBIL score as well.
Crucial Tips for Personal Loan Pre-closure
If you want to save money by avoiding high-interest rates on a personal loan, going with a personal loan pre-closure is a smart move. However, you need to be cautious before deciding to prepay a personal loan. We have highlighted some proven tips to help you get the best out of your personal loan pre-closure decision.
Define a budget: First, determine how much you can quickly pay back each month by keeping your income and expenses in mind. Make debt payments a priority and try to stay away from wasteful spending.
Pay More Each Month: You can choose to pay off your debt rapidly if you pay more than the minimal amount to be paid. Thus, even a small extra payment now might have a big impact.
Negotiate for a Lower Interest Rate: Contact your lender to ask for a lower interest rate. A reduced interest rate expedites your payback by allocating a larger portion of your payment to the principal amount.
Avoid Fresh Loans And Stay Disciplined: Refrain from acquiring new debt while repaying your Personal Loan. To maintain discipline, concentrate on lowering your total debt burden, use credit cards hard, and monitor your progress to keep your spirits high.
The information above about personal loan pre-closure will help you make the right decision. Pre-closing a personal loan is a crucial decision, which means it must carefully consider all the underlying factors to get the best outcomes.