Personal loans attract some of the highest interest rates often ranging between 10% to 20% p.a. One of the main reasons for that is personal loans are often unsecured in nature. However, it is still a popular credit facility in India as it helps cover a temporary or an urgent financial need.
Personal loans can be used to purchase consumer durables, plan weddings, pay for health treatment or even vacation.
Most banks in the country offer these instant 2 Lakh Personal Loan or higher amounts with some variations in interest rates, processing charges and other fees. However, if you can prepay a personal loan in part or full, there are certain benefits in store for you.
What is Personal Loan Prepayment?
Firstly, let’s understand what personal loan prepayment is. In financial terms, it is an act of paying off the remaining outstanding balance of your personal loan (in full or part) before its tenure ends.
Prepayment can be done in lump sum or through extra payments in addition to your regular equated monthly instalments (EMIs).
Full Prepayment
If the prepayment can be done in full, relatively early into the loan tenure, you tend to save a lot on the interest component. A personal loan generally comes with a lock-in period of about 12 months, after which the customer can opt for full foreclosure of the entire outstanding amount.
If you prepay the entire amount early in the tenure, you can enjoy the benefits of paying less interest. However, even at a later stage of prepayment, where you may have paid much of the interest, if you do have some excess money, it is always better to prepay your personal loan and get the monkey off your back.
Some lenders, however, charge a prepayment penalty ranging from 3% to 5% when a customer opts for a 3 Lakh Personal Loan or any loan amount prepayment.
The Reserve Bank of India (RBI) recently directed banks to stop charging preclosure penalties from borrowers, but this only applies to loans availed on a floating interest rate basis. Since most personal loans are offered on a fixed-rate basis, the RBI’s rule does not apply.
However, some public and private sector banks may offer personal loans with zero prepayment charges to attract customers. In this case, making use of idle cash can be advantageous for a customer who wants to prepay a loan.
Part Prepayment
Part prepayment of a personal loan is when you have an idle lump sum cash, but it is not sufficient to prepay your entire principal loan outstanding. In this case, part prepayment works because it helps bring down the principal amount unpaid, which brings down your EMIs and also the total interest cost.
However, it is important to keep in mind that only if you pay a significant lumsum amount as part payment, it will be helpful.
Part prepayment is an easy but effective way to save on interest amount as the prepaid amount directly gets deducted from your total principal outstanding as on the date/ month of making the partial payment.
Personal Loan Prepayment Benefits
- Reduction in overall interest cost.
- Improved credit score.
- Shorter repayment tenure.
- Increased savings.
- Going debt-free
Personal Loan Prepayment Clauses
- Many lenders charge a prepayment penalty on a personal loan, either part or full prepayment. This can be a flat fee or a percentage of the outstanding loan balance.
- Some lenders may charge a fee for processing your personal loan prepayment.
- Some lenders have a lock-in period for the prepayment of a personal loan. This period is usually 12 months from the loan commencement.
- Some lenders may require borrowers to give a notice prior to prepaying the loan. For instance, you may be required to give a 30-day notice before opting for prepayment.
- Some lenders may have restrictions on the loan amount being prepaid. For instance, a lender may allow you to make only a partial prepayment of 25% of the outstanding loan amount once a year.
Prepayment of Zype Loan
Every loan provider has different personal loan prepayment policies and charges. Usually, prepayment of personal loans carries a penalty of 3% and 6% of the remaining balance. However, a personal loan availed through the Zype app comes with zero additional fee on prepayment. If you borrow a Zype loan, you can repay your loan before the tenure without any additional charges.
How to Prepay Your Personal Loan?
- Think about your decision before making a move. Make sure you have considered all other options and pros and cons. Additionally, read your loan agreement to find any restrictions regarding prepayment, such as minimum partial prepayment amount, lock-in periods, charges, etc.
- Communicate with your lender or loan agent and discuss your intentions of prepaying the loan. Take their assistance to prepare any necessary documents.
- Once you have interacted with the lender, gather the required payment to pre-close or partially prepay your loan. Look for the modes of payment beforehand.
- After prepaying your loan and charges (if any), ensure that the payment has been validated by the lender. This can be done through a loan closure letter sent by the lender or a revised loan statement.
