Personal loan is fast becoming the preferred mode of borrowing in India. With many attractive features like instant borrowing, minimal documentation, easy processing, and flexible usage, personal loans can serve you best in any situation. However, one of the things that you must ask your lender before applying for the instant cash loan is the pre-payment clause.
There are many situations when you may consider pre-paying your personal loan or salary loan. You may do this to improve your credit score, reduce your EMI burden, and reduce the total interest pay out. However, before opting for pre-payment of your loan, you must know the pros and cons of pre-paying your personal loan.
Advantages of prepaying your personal loan
1. It allows you to end EMIs and free up your monthly budget
When you take a loan, you are blocking a certain amount of your monthly income towards loan repayment. If you prepay your instant cash loan, you will free up this monthly blockage from your salary and can use it for other purposes. Moreover, if you are planning to take a break or you anticipate a recession, paying off a loan in advance will allow you to live better in hard times.
2. It allows you to pay less than what you would have paid in a full term loan repayment
When you pay a loan earlier than its scheduled tenure, you do not have to pay the interest rate for the full loan tenure. Instead, you are only required to pay the outstanding principal amount and a lumpsum interest on it, which is much lower that your regular interest. However, do note that there arecertain fees or charges associated with prepayment of the loan. Make sure to compare the charges against the interest saved.
3. It provides a significant and immediate boost to your credit score
When you take a salary loan and pay it back in full in advance, your lenders will mark the same as prepaid in full to the different credit agencies. Being able to pay off your loan earlier than its due period proves you to be a highly disciplined and reliable borrower. Credit bureau records this and it reflects in your credit score. Thus, closing your loan at the earliest is always good for your credit score.
4. It helps you prepare for a big ticket loan
Many times you need to prepare for a big ticket loan like a loan to buy a home or a shop or any commercial property or even a luxury car. In such a case, the fact that you do not have any other loan pending on your monthly income can act as a big plus point. It assures your lender that you have the capacity to handle the EMI for your new loan.
5. It provides you peace of mind
Finally, many people consider that paying off a loan early bring a certain level of peace of mind because there is no fixed monthly financial commitment on your part. Imagine having to worry all the time about making enough money to pay off the loan instalments next months. Prepaying an instant cash loan means you do not have to worry about it at all.
Cons of loan prepayment
1. It can wipe off your savings
This is the first thing that you must consider when thinking about pre-paying your loan. If you direct all your funds to prepay the personal loan, you may not have any savings left for other emergencies. Many people are uncomfortable with the idea of stripping their saving account of the last penny.
2. If you are in later period of loan repayment, saving might not be very high
Prepayment towards a loan can save you money but only if you have a considerable tenure to serve. If you are already in the later period of your loan schedule, the saving from paying off the loan early may not be much. In addition to that, there are other charges and fees like the pre-closure fees that you must consider.
3. Opportunity cost may be too high
You must consider if instead of paying off your loan amount, if investing it somewhere else may help earn you more. For example you can invest your money in mutual funds or stocks where the returns are much higher than the loan interest rate you are serving. However, do consider that there is a high risk associated with such investments. You must possess the proper knowledge of investments to make the right decision.
4. May involve a lot of paperwork
Pre-closing the loan may involve a lot of paperwork. Though it may not be true in the case of an instant cash loan app, but many conventional lenders require you to submit a lot of paperwork for pre-closing the loan.
Do’s & Don’ts Of Prepayment Or Foreclosure Of A Loan
- You must calculate the impact of the pre-payment on the rest of your finances.
- Do not exhaust your savings for retirement or child’s education for pre-paying your loan.
- Evaluate the tax benefits that you may lose by foreclosing your loan.
- It is better to prepay the loan in the beginning of the loan tenure as against to prepaying at a later date.
- When opting for balance transfer of loans consider the processing fees and other charges levied.
- Salary loans usually have shorter tenures. So, make the right calculations before borrowing because pre-payment may not be very feasible in case of salary loans.
There is no universal answer to the question if prepayment of a loan is a good or a bad idea. This depends on many factors. Like the pending loan tenure, the total interest outgo, the pre-closure charges and much more. Also note that not all lenders offer you pre-closure options on instant cash loans. So, while choosing your loan partner, make sure to check if your lender offers you pre-payment facility.