Personal loans have become popular recently, as they are more accessible and easy to avail nowadays. The stigma attached to availing a personal loan is disappearing slowly and many people are now considering to apply for personal loans for their immediate need of funds. Also, now you can calculate the EMIs yourself by using the personal loan EMI calculator. There is no need to visit the branch to get complete know-how the personal loan offered. You get all the information online itself.
The interest rate for a personal loan is what everybody looks at, but if there are chances that you will get some extra funds during the repayment period then you can also discuss about the pre-payment structure with the lender.
Pre-payment of an instant personal loan helps you become debt free sooner. Here we help you understand if pre-payment of personal loans is advisable or not.
Part pre-payment is a good option to consider as it brings down the total outstanding principal amount. If there is a surplus of funds, then you can use it to do a part pre-payment. As the principal amount comes down, so does the interest rate as it is charged on the principal amount. This way you can save on the interest and not pay more of it, as per the decided tenure. It is important to note that this type of part-payment is only helpful when you have a lump sum amount of money for payment.
For example, if you have taken a loan of Rs 4 Lakhs with a tenure of 2 years on a 15% interest rate, then your monthly EMI comes to Rs 19,395. The total amount of interest rate that will you pay will be Rs 65,472. The amount of interest paid for the first year will be Rs 44,723. This is approximately 42% of your interest. The remaining amount is Rs 2,31,382. If you do a part payment of Rs 50,000, then this will reduce your principal amount to Rs 1,81,382, your tenure will go down to 10 months and you will save interest of Rs 11,353.
Full Pre-payment means paying off the entire outstanding amount. Many lenders will have set a lock-in period. Hence if you want to do a full prepayment then you need to check with the lender about the charges for the same and if there is a lock-in period or not.
Citing from the above example, you will pay almost 42% of your interest rate in the first year itself. Only one year remains and if you decide to pay the remaining Rs 2,31,382, then you can save interest on the same.
Pre-payment as an option is useful if you decide to do it as soon as the lock-in period ends. A full prepayment helps shooting up our credit score in the long run. You need to discuss the charges with your lender for part or full pre-payment options before applying for the loan.