With the advancements and will to help individuals in their difficult times, banks have made personal loans instantly accessible. One of the brighter sides concerning personal loans is the presence of down payments. However, the associated charges might remain hidden or ignored. Helping you walk through the same, we specifically cover your options on paying back the personal loan early. Additionally, if you are planning for a loan, remember to compare personal loan rates of interest among different lenders and banks. Also, utilize the EMI calculator for personal loan to know the tenure and rate of interest that suits your financial budget.
What is a Prepayment and Prepayment Penalty?
Prepayment refers to the payment made before the due date on a debt or installment loan. The banks offer this facility to ease the burden off of the borrower. The prepayment can be the complete payoff of the loan or depositing partial amounts. However, the payment is associated with some fees that need to be paid while paying the amount. This additional amount is referred to as a prepayment penalty.
Why Do Banks Charge Prepayment Fees?
Banks borrow the funds at specific interest rates. The banks also lend the money, but at higher interest rates, to earn their profit. The margin between these interest rates helps them earn. Now, if a borrower pays back the complete amount or partial amount, the ultimate aim is to save the interest charges imposed on them. It leads to the bank’s loss, which has to be covered up. To make up for their loss, the banks introduced the concept of prepayment fees.
The strictness of the concept varies among the banks. Different banks levy different charges on prepayment. Besides, few banks or lenders might waive the prepayment fees after a specific time period. It makes knowing the information on the same very crucial. The prepayment cost can be any of the three: a specific amount, a percentage of the loan balance, or the amount of loss the lender or bank incurred due to prepayment.
Considerations Before Planning Prepayment For Personal Loan
Candidates willing to opt for personal loans might think to pay back the complete loan based on certain income. However, the prepayment charges at any specific time must be considered to understand the possibility of an option. On the other hand, if you already have taken the loan and are willing to prepay it, here are some considerations to make before you finalize the decision:
Charges
First and foremost, know the exact amount of prepayment charge available to you at the moment of prepayment. Validate even the presence or absence of such charges and include the same in your decision-making factors.
Credit Score
Prepayment reduces the outstanding balance, thus improving the credit utilization ratio. The impact favors the credit score. Additionally, the consistent payments also contribute to the benefit of the score.
Future Need
Prepaying the personal loan means closure of the available balance. It restricts future access to the needs. The effect of this on your financial management should be considered before planning a prepayment and, hence, closure of the personal loan. You should utilize an EMI calculator for personal loans to estimate the savings and expenditures in either scenario. Accordingly, make a decision.
Interest Rate
Continuing the previous point, remember that the interest rate fluctuates. If you need personal loans again, the interest rates might be higher or lower. Consider the same with emphasis on a market rate before prepaying the value. If you are paying partially for the loan, you will be continuing with your personal loan. The personal loan rate of interest will play a role in refinancing.
Tax
The validity of this consideration depends on one’s area of residence. The prepayment is taxable under certain conditions for either or both borrower and lender. The borrower’s tax is levied on the prepayment amount, while the lender’s tax is levied on the amount of interest income. A tax professional will rightly enlighten you with personal situations depending on your problem, and hence, it is advisable to consult them.
Factors Determining Prepayment Penalty on Personal Loan
The prepayment penalty depends on different factors, such as:
Loan type: The prepayment charges vary for the type of loan, which can be secured or unsecured.
Loan tenure: The prepayment charges can be higher during initial periods or up to certain EMIs. They might also lower or be completely waived off with a passing period or might not change depending on the lender. Moreover, short-tenure loans will have higher prepayment costs compared to long-tenure ones.
Lender: The prepayment penalty varies among lenders. Go through the terms and conditions of each for the right decision.
Interest rate: The prepayment charges are influenced by the interest rates. The high personal loan rate of interest is associated with high prepayment costs.
Conclusion
Personal loans are a great help with approval rates generally lying between 3 to 4 days. The money is handed out in a few days. Candidates generally also think to prepay the loan when possible. However, they are unaware of the associated fees, which might influence their decision later or can change their financial planning. Hence, considering all the factors while opting for the option is actually important. Do consult your financial advisor and be enlightened about the other interest rates and changes in prepayment fees on different time periods to make wise decisions.
Frequently Asked Questions
Q1. Can I pay back the complete loan without a prepayment penalty?
Ans. It is possible to prepay the loan after paying back a certain number of EMIs. However, the exact number or presence of such facilities completely depends on the lender. You should confirm it beforehand or connect with the lender anytime to know about the possible options.
Q2. What are the other charges associated with personal loans?
Ans. Besides prepayment penalties, banks and lenders charge other fees such as origination fees, APR, personal loan rate of interest, processing fees, documentation fees, and similar other charges.
Q3. How to decide the tenure of a personal loan?
Ans. Make use of an EMI calculator for personal loans. Choose the suitable interest rate among different banks and lenders. After finding the right one according to you, use the calculator to find the appropriate EMI based on your set amount, personal loan rate of interest and thought tenure. Vary between the amount and tenure to find the right fit for you.
Q4. Can I get a personal loan if I am unemployed?
Ans. The personal loan can be availed if unemployed. Candidates need to take a secured loan in such conditions. The collateral can be the money-back policy of life insurance, investment in stocks or mutual funds, or fixed deposit, among multiple other options.
