Because of its flexibility and multiple features, a personal loan is one of the most extensively used loan products in the nation. According to a Business Standard poll, over 96 percent of new bank loans are a small personal loan. Furthermore, according to an Economic Times poll, unsecured loans such as credit cards and personal loans would reach 13.8 lakh crores by the end of the fiscal year 2024. Nowadays, everyone knows how to get a personal loan.
A prepayment penalty is a levy that lenders might apply when you pay your debt off early. Some loans, such as 30-year mortgages or four-year vehicle loans, have an estimated payback date. If you pay off the debt before then and your loan contains a prepayment penalty clause, you will have to pay an extra cost.
What exactly are prepayments?
Prepaying personal loans simply means returning the debt (either half or totally) before the due date. Prepaying your loan might relieve you of the weight of debt. Let’s go through personal loans with prepayment options.
A prepayment penalty is a cost that lenders may apply when you pay off part or all of your loan amount before the loan’s planned maturity date.
Advantages of a Personal Loan with a Prepayment Option
There are various advantages to prepaying your loan. Several of them are listed below:
Be debt-free sooner: Paying off your portion of the loan can help you reduce the amount of your loan EMI.
The lowered outflow of interest:
This is advantageous when your loan has a decreasing balance rate. The portion of your loan payment is subtracted from your principal, and interest is computed on the remaining balance. As a result, the relevant interest rate is reduced, making it more advantageous than the personal loan interest. Prepayment of your outstanding loan amount, whether partial or whole, will undoubtedly reduce your interest outgo.
Improved CIBIL score:
Paying your loan bills in advance shows that you are financially responsible and can refund your debts on time. Because you prepay your loan in advance, it has a positive impact on your CIBIL score and may help you easily get future loans at low-interest rates.
Better FOIR:
Prepaying your debts has a significant influence on your FOIR (Financial Obligations to Income Ratio). The amount of monthly income used to pay off one’s monthly financial commitments is measured by one’s FOIR. Your FOIR will be significantly reduced if your loan debt payments are removed from the equation. As a result, you will be able to get bigger loans with lower personal loan interest.
Prepayment Types
There are two sorts of prepayments that may be made on a small personal loan. There are partial and full prepayments available. In this section, we will look at both types and know how to get a personal loan.
Partial Payoff of a Personal Loan
If your funds do not enable you to entirely pay off your debt, you may pay off a portion of your loan. A benefit of making a partial payment on your debt is that it does not have to be done just once. This implies that you may make monthly pre-payments of lump sum sums toward your loan at your leisure. Consider the pre-payment costs, however, if you want to make several partial prepayments on your loan.
Complete repayment of a personal loan
On the other hand, if you have sufficient funds, you may simply pay off your loan in a single payment. If your funds allow it, you may prepay the whole loan amount even at the end of your loan term. You must, once again, evaluate the expenses connected with this.
Charges Involved with Personal Loan Prepayment
If you choose to prepay your loan, the interest earned by the lender during the loan term will be significantly reduced. As a result, lenders incur penalties when making prepayments to make up the difference. These fees are often assessed as a percentage of the outstanding loan amount and may include relevant taxes.
These fees often vary between 3-5 percent. The Reserve Bank of India (RBI) required in 2014 that banks abstain from charging fees for loan prepayment. Furthermore, the RBI has directed NFBCs to avoid imposing prepayment penalty on personal loans. However, this is only applicable to loans with floating-rate interest rates.
Summary
It is recommended that you prepay your loan in its early stages if you are capable of doing so. In the long term, prepaying your loan strengthens your candidacy for future loan applications and improves your finances overall. As a result, if you wish to proceed with the prepayment of a small personal loan, speak with your lender to discuss the fees associated. You should make certain that your lender reveals any prepayment penalty upfront. Make certain that you are not being charged any hidden fees or levies.
All fees for the Bajaj Finserv Personal Loan are entirely transparent. Charges are provided to you ahead of time so that you may make an educated financial choice. Furthermore, the personal loan from Bajaj Finserv comes with a slew of advantages. Your online application will be accepted within minutes, and the loan amount will be sent into your bank account within 24 hours*.