Preclosure of Personal Loan - Benefits, Tenure, Impact, Steps & Charges
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Why Pre-Closing A Personal Loan Is Crucial?

Timely debt repayment is an admirable financial habit that lets you build a solid credit history. However, there are certain caveats to consider when it comes to closing the loan before its maturity. Typically, it attracts prepayment charges that should not be more than what you will save by prepaying the loan. Although loan prepayment does not harm your credit, it may set it back if you want to build it fast.

In the following sections, we will discuss loan preclosure, why it is crucial, and how to make an informed decision.

What is the Preclosure of a Personal Loan?

When you borrow a Personal Loan, you use a Personal Loan EMI Calculator to choose a loan term with budget-friendly EMIs. Still, you may ask, 'Can I close my Personal Loan before tenure?’ The answer is yes. A preclosure means fully completing a loan repayment before the completion of the loan term. This means paying the outstanding amount in a lump sum instead of monthly instalments. Preclosure saves considerable amounts on EMIs and Personal Loan interest rates. However, prior to prepaying a loan before maturity, check the prepayment charges and read all terms and conditions to avoid confusion later.

Types of Loan Prepayments

Basically, there are two types of Personal Loan prepayments:

Full Prepayment: Usually, Personal Loans have a lock-in period of 6-12 months before which you cannot preclose them. A complete Personal Loan preclosure allows you to enjoy a reduced interest cost and relieves your debt burden. However, it could cost heavily since you must pay a lump sum from your pocket. Rather than preclosing the loan, you can invest it in a lucrative avenue to accumulate returns and recover the interest cost.

Partial Prepayment: Partial prepayment means paying an amount more than your monthly EMI amount. Gradually, it reduces your outstanding principal balance and decreases your EMI and interest costs. To make a partial prepayment on your loan, you must contact your lender and inform them about the same.

After submitting your request, you will receive revised instructions. Moreover, you must continue paying your subsequent EMIs according to the pre-determined repayment schedule. However, you can benefit from a partial prepayment only if you contribute a substantial amount. Before making any part prepayment amount, check the Personal Loan fees & charges.

Benefits of Loan Preclosure

Loan preclosure is a good decision in many circumstances, as it offers multiple benefits, including the following:

  • Save Big on the Interest Cost: If you pre-close a Personal Loan, you save a considerable amount on the total interest outgo.
  • Positive Mark in Credit History: A preclosure improves your Personal Loan eligibility for future loans, as it projects you as a responsible borrower with an honest intention to repay.
  • Reduce Debt-Burden: A loan preclosure makes you debt-free, enabling you to live a stress-free life and attain financial independence. Moreover, it reduces the risk of debt circle, and you get more disposable income in your hands each month.

The Right Time to Preclose a Personal Loan

Personal Loan preclosure is an ideal choice under the following specific scenarios:

  • If you have not gone too far in your loan tenure

You can save considerably on the interest cost if you preclose the loan early in the loan tenure. Check your loan agreement to know ‘can we close Personal Loan before 1 year’? If yes, conduct a cost-benefit analysis to determine if the preclosure of Personal Loan will be beneficial for you.

  • If you have an excellent credit history and score

If you already have a strong credit history and score, loan preclosure will not impact your credit significantly. Besides, it also indicates your commitment to repay your credit on time, improving your Personal Loan eligibility for future loan applications.

Times When You Should Avoid Loan Preclosure

Here are a few scenarios when you should avoid the preclosure of Personal Loan:

  • If you want to build your credit score

If you have a low credit score or if this is your first loan, repaying it on time will be better than preclosing it before term end. Gradually pay your EMIs on time and let them build your credit history. Preclosing the loan will suddenly stop the improvement instead of helping it.

  • If the preclosure charges are exorbitant

Preclosing a loan, especially in the later stages of tenure, will not result in considerable savings. Besides, the Personal Loan fees & charges for preclosure will increase your loan cost. Therefore, working out a cost-benefit analysis is essential to understand if preclosure will be a smart decision.

Impact of Loan Preclosure on Your Credit Score

Loan preclosure does not directly impact credit scores. However, the points you could have earned with timely EMI repayments stop suddenly with a single preclosure. Once you pay off your loan, it shows 'closed' in your credit report, and there is no chance of improving the score after that.

Personal Loan Fees & Charges for Loan Preclosure

Before deciding to preclose a Personal Loan, analyse the cost-benefit by reading the terms and conditions carefully. Contact the lender's customer representative if you cannot find clear information about preclosure in the loan document.

In August 2019, the RBI released guidelines stating that lending institutions cannot charge prepayment penalties and foreclosure fees for loans with floating interest rates. Moreover, every loan company has a lock-in period before which you cannot preclose your loan. So, check these terms and conditions before considering a loan preclosure.

Steps for a Personal Loan Preclosure

  • Visit your lender’s website or loan app.
  • Provide the required Personal Loan docs like your identity proof, bank statements showing your last EMI’s final clearance.
  • Make the payment of your balance amount.
  • If applicable, the lender will deduct the prepayment charges and send you an acknowledgement letter for future reference.

Once you complete these steps, you will receive an acknowledgement letter, and the loan account will appear as 'closed' in your credit report.

A loan preclosure reflects your sound financial stability and standing. However, deciding to preclose a loan depends on your situation and how it will impact your financial plan and budget. If you are worried about the applicable Personal Loan fees & charges, read the loan document carefully to find the details.

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Disclaimer: This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. The Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Article. The information contained in this Article is sourced from empaneled external experts for the benefit of the customers and it does not constitute legal advice from the Bank. The Bank, its directors, employees and the contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein. Tax laws are subject to amendment from time to time. The above information is for general understanding and reference. This is not legal advice or tax advice, and users are advised to consult their tax advisors before making any decision or taking any action.