Can I Prepay My Personal Loan Without Any Extra Charges?
Last Updated : April 8, 2020, 7:19 p.m.
Personal loans are high cost loans courtesy interest rates that can be as high as 25% per annum. The resultant EMIs may come to your budget but interest outgo can still be high enough to bother you. To contain the outflow of interest, you can prepay the loan in full or in parts. But banks levy some charges as prepayment reduces their interest earnings. Broadly, the charges can be anywhere between 2%-5% of the outstanding loan balance plus 18% Goods and Services Tax (GST). However, some banks don’t charge on prepayment and thus help you save on the same. Check out the list of such banks.
Banks That Allow Personal Loan Prepayment Without Any Charges
If you are servicing a personal loan at any of these banks, you’ve got a chance to prepay the same without any charges.
How Does the Zero Prepayment Charge Enhance Your Savings?
As stated earlier, the prepayment can be made either in full or parts. And if you can do so without having to pay any charges, you can save more. You can understand the same better considering the example shown below.
Example – You are servicing a 5-year personal loan of INR 7 lakh at 18% interest rate. In this case, you must have been paying an EMI of INR 17,775. If your loan has completed 2 of the 5 years, your outstanding balance must be around INR 4,91,679. Given the loan structure in place, you must have paid interest of INR 2,18,290. If you continue the loan at this pace, you could end up paying interest of INR 3,66,524.
In case you part pay 2 lakh, your outstanding loan balance will reduce to INR 2,91,679. Your new EMI will be INR 10,545, which will accumulate interest worth INR 87,937 over the remaining span of 3 years.
If you add the interest you’ve paid so far to the interest payable over the next 3 years, the total estimated outgo will be INR 3,06,227, which is INR 60,297 lower than what will be the case if you continue without any part payment. And, if there are no charges on prepayment, your savings will stand tall at INR 60,297.
In case your bank charges on the prepayment at 4% plus taxes, the fee will amount to INR 9,440 (4% of 2,00,000 + 18% GST). The resultant savings will thus reduce to INR 50,857.
How Can You Decide/Accumulate the Prepayment Amount?
Given the benefits, it’s better to go for prepayment. But the question is, how can you arrange such a sum? The question assumes significance as you may not receive a fat bonus or a sudden windfall of earnings. So, the strategy should be to accumulate by making the best use of your income. Invest in mutual funds, fixed deposits or any other instruments according to your risk appetite.
To execute your plans better, you should use the personal loan EMI calculator . The calculator, besides showing the interest and principal repayments periodically, opens before you the outstanding balance at different points of time. You can thus figure out the time by which you can prepay.
But shall you prepay the whole sum that you accumulate? A tricky question to answer! But, if you feel at the time of prepayment that your earnings are likely to be uncertain in times to come, you should use all to prepay and lessen your obligations. In case you feel no problem in your earnings, pay a significantly higher chunk out of your savings and keep the remaining with you.