Personal Loan Prepayment

The majority of financial institutions allow borrowers to prepay their loans, which allows them to settle their debt before the loan’s due date. In other words, loan prepayment is the payment of the remaining loan balance in full or part before the loan’s maturity. The borrower has the option of paying down the entire loan amount up front or a sum larger than the monthly instalment. Nevertheless, a debt would be foreclosed upon if it was fully repaid.

What is Prepayment of Personal Loan?

Prepayment refers to the settlement of a debt or instalment loan before the day it is officially due. A prepayment can be the early closure of an account due to the payment of a bill, an operating expense, or a non-operating expense. An individual, a corporation, or any other kind of organisation can make a prepayment.

Through prepayment, a variety of debts and responsibilities are settled in advance. Rent, salaries, revolving lines of credit, and other short- or long-term financial obligations may be paid in advance by corporations.

Consumers can prepay credit card charges before they ever receive a statement. Or they could pay off a loan early by refinancing it with a different lender or by paying the entire bill themselves.

Mortgages are one type of loan that may have a prepayment penalty. If there is such a penalty, it must be disclosed to and accepted by the borrowers at the time the loan is obtained.

Only full payment of the balance, usually accomplished by refinancing the mortgage, may be subject to the penalty. Usually, a borrower is not penalised for making sporadic additional principal payments.

What are the Types of Prepayment & Penalty?

Prepayments are typical in many different situations. Both people and big companies make payments in advance.

Corporate Advances

The most typical prepayments in a corporate setting are costs. These costs for products or services that will be used in the future are fully paid in one accounting period. When the asset is actually utilised or consumed, the prepayment is classed as a regular expense. On the balance sheet of the corporation, a prepaid expense is first categorised as a current asset.

Prepayments made by People

Individuals also make prepayments, and personal accounting is much simpler. An individual may rack up a credit card bill each month with a settlement date of 30 days following the end of the month.

Taxpayers’ advance payment

When a portion of their pay is deducted from their paycheck for taxes, taxpayers frequently—voluntarily or not—make a prepayment of taxes. Although their employers are required to withhold taxes from each pay period and submit the money to the government on their behalf, employees’ taxes are technically due on or around April 15 of each year.

Self-employed people are required to file quarterly estimated tax returns as a prepayment of taxes.

In any instance, taxpayers get their surplus money back as a tax refund if they pay more than their annual tax obligations.

List of Personal Loan Prepayment Charges of Top Banks in India

What are the Pros And Cons Of Personal Loan Prepayment? 

There are several pros and cons when it comes to the prepayment of personal loans in India. Given below are some of the detailed pros and cons for a better understanding of prepayment personal loans:

What Should One Consider Before Prepaying a Personal Loan?

Customers are discouraged from choosing bundles with minimal upfront fees. The first step would be to weigh prepayment penalties against interest rates. It is recommended that you select the option with lower interest if the prepayment fees are modest, but the rate of interest is high. You can use the prepayment calculator to quantify the benefits that minimal prepayment fees might offer you. Since prepayments are mostly influenced by a customer’s financial situation, it is also necessary to analyse the likelihood that the loan will be repaid early. Prepayment expenses must be taken into account if the customer anticipates a significant increase in income; otherwise, low-interest packages can be the best choice for you.

How to Prepay a Personal Loan?

The lock-in durations for personal loans approved by banks and NBFCs differ since they are chosen by the lenders. Before applying for a personal loan, you must carefully evaluate the lock-in term. Borrowers are not permitted to prepay their personal loans in full or in part during the lock-in term. This lock-in phase may last anywhere from six months to a year or even longer in some circumstances. Today, a lot of lenders are loosening their rules and approving personal loans with no lock-in term.

You should prepare ahead and estimate the actual advantage you will obtain before attempting to pay back your loan amount. The advantages of prepaying personal loans depend on the prepayment fees, the amount still owed, and the remaining loan term. 

You can confirm the amount due and the interest expense you are responsible for honouring by utilising an online calculator. Your wisest course of action will be to proceed with the prepayment of the personal loan if the interest outlay is greater than the prepayment penalties.

You must do the following actions in order to settle your debts prior to the loan’s term expiring:

• Speak with the bank or NBFC from where you obtained the loan.
• Submit the personal loan prepayment check.
• The bank representatives will then confirm this before shutting the loan account.
• Once you’ve decided to prepay your personal loan, make sure to get any necessary paperwork, such as a NOC.

Conclusion 

Personal loans should only be used to get through a crisis and should not be seen as an extension of your paycheck. There are several obvious benefits to prepaying your personal loan, like interest savings. While paying off loans early would improve your standing with the credit bureaus, you should be aware of the prepayment penalty fee that banks and NBFCs charge.