When To Prepay Your Personal Loan

Prepaying a personal loan is the effective way to get the debt money off your back. But keep in mind that it comes with a hefty penalty. Most banks have clauses regarding prepayment included in a loan agreement and charge a fee, up to 5%, on the outstanding principal amount. Hence, it is a good idea to compare the prepayment fees levied by different banks before one opts for a personal loan from a particular lender. Due to an increased competition, you might be able to get better terms on your prepayment charges if you negotiate with your bank. But even with the prepayment penalty it is advisable to prepay your personal loan.

A personal loan is an unsecured loan and thus attracts a specific rate of interest. Since this rate of interest is often quite high compared to other loans, every borrower must look out for opportunities to reduce the high cost burden present on this front. If there is surplus cash or some additional cash flow generated by a person or some other way where funds are available at a lower cost then it makes sense to prepay the loan after considering the cost involved. But there are some conditions to prepay a loan. You cannot prepay your loan outstanding before six months of availing a loan. Also, most banks insist on making a full payment; part payment or paying in installments is allowed in a very few institutions.

So when should you prepay your loan? It has seen that if you prepay your loan in the beginning, say within 6-12 months of the loan disbursal, you benefit more. This is because your savings on the interest is more as banks charge around 50 per cent of interest in the first year of the loan tenure. Banks lose a great chunk of interest amount when a borrower pays back a loan before time. It covers only the outstanding principal amount, thus banks levy a high penalty in order to make up for the lost interest. When you try to pay off your loan when your loan is nearing the end of the tenure, you do not save on interest cost, as you have already paid a major part of interest amount, and whatever remains to be paid is the principal amount.