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Benefits of Personal Loan Prepayment

Benefits of Personal Loan Prepayment

Last Updated : Sept. 22, 2022, 6:27 p.m.

Personal loans are unsecured loans that you can avail of without providing any security or collateral to the lender. That’s why the loan gets disbursed quickly to the bank account. The eligibility for a personal loan depends firmly on your income and credit score. However, the loan comes at a higher rate of interest compared to most other loans. The average personal loan interest rate ranges from 10%-20% per annum across most banks in India. In case someone chooses a personal loan at a much higher rate than what’s prevailing in the market, the extent of interest repayment can be much more for the concerned individual. However, you can reduce the payment using the personal loan prepayment facility. The word ‘Prepayment’ means the payment of the outstanding loan balance before the maturity. Let’s read this article that tells the benefits of personal loan prepayment and how you should go about it.

Advantages of Personal Loan Prepayment

Reduces Loan Burden

When you do a personal loan prepayment, you reduce the burden of high interest rate on your loan payments. Yes, compared to your regular EMI payments, if you calculate the savings amount, you’ll see that prepayment allows you to save on the interest outgo. It is beneficial to the customers to close their loan account before maturity. And with the help of the personal loan prepayment, you can manage your day to day expenses without worrying about EMI payments anymore.

Improves Credit Score

The personal loan prepayment also has a positive impact on your credit score. A credit score ranges from 300 to 900 in India. For an ideal credit score, you need to maintain your credit history which depends on the repayment of loans and credit card bills. And when you close your loan before maturity, it shows that you are a creditworthy applicant.

Helps You Save More

Not only will personal loan prepayment be beneficial for the loan repayments, but it can also give you that space to care about other important things. Because after the EMI payments, there are no obligations to pay from your monthly income and you can utilize this time to invest in mutual funds or fixed deposit schemes as per your convenience.

How Can a Personal Loan Prepayment be Possible?

To prepay the borrowed loan amount, you need planning. Because without any prepayment plan, it might be difficult for you to prepay the loan successfully. So, we suggest that you take assistance from a personal loan EMI calculator . Why? Because it can help you estimate the outstanding balance of your borrowed loan amount at different points of time. Understand it better with the example below.

Suppose you borrow INR 6 lakh from a bank at an interest rate of 13.00% per annum. The tenure you choose for its repayment is 5 years. And now before you proceed to prepayment, you can take the help of the personal loan EMI calculator. Check out the table below to know the EMI tool result.

Table Showing EMI, Interest Outgo, and Total Repayment Amount

EMI, Total Interest Outgo, Total Repayment (Interest + Principal)

Year Principal Interest Balance Amount
1 ₹ 91,124 ₹ 72,697 ₹ 5,08,875
2 ₹ 1,03,703 ₹ 60,119 ₹ 4,05,171
3 ₹ 1,18,017 ₹ 45,805 ₹ 2,87,154
4 ₹ 1,34,307 ₹ 29,514 ₹ 1,52,846
5 ₹ 1,52,992 ₹ 10,976 ₹ 0

Personal Loan Prepayment

In a personal loan prepayment, you pay off your loan balance amount before the loan tenure by following the steps shown below.

  1. Contact the bank or NBFC by the time you want to prepay
  2. Submit the personal loan prepayment cheque
  3. Bank officials would verify the details before going ahead with the loan closure
  4. Collect documents such as NOC on prepaying the loan
  5. For any assistance, you can contact the customer care service

How Much Can You Save on Personal Loan Prepayment?

Let’s consider an example below to gauge the savings on a personal loan prepayment.

Example – You have borrowed a personal loan of INR 5 lakh at an interest rate of 12.50% per annum for 5 years. After 2 years of EMI payment, you have got the savings to close the loan early. So, you decide to prepay the personal loan. The bank charges a prepayment fee that is 2% of your outstanding balance. Check out the table below and know what amount you’ll save.

Loan Aspects Details
Loan Amount INR 5,00,000
Interest Rate 12.50%
Tenure 5 years
Estimated EMI INR 11,249
Estimated Interest Outgo Over 5 Years INR 1,74,938
Balance Loan Amount after 2 years of EMI payment INR 3,36,255
Interest Paid till 2 years INR 1,07,230
Prepayment Fee INR 6,725
Savings Amount INR 67,708 (1,74,938 - 1,07,230)
Total Saving INR 60,983 (67,708 - 6,725)

Personal Loan Prepayment Fee

Personal loan prepayment is the process when you repay the loan before the loan tenure ends. And some lenders levy a fee on the prepayment of this loan. Most lenders allow prepayment after the successful payment of the first 12 EMIs. To compensate for the interest amount, the bank charges a prepayment fee from the customer. See the table below and know the prepayment fee charged by banks in India.

Banks Prepayment Fee
State Bank of India (SBI) Nil - 3% of the principal outstanding
ICICI Bank 5% of principal outstanding + GST
HDFC Bank Nil-Up to 4% on the principal outstanding + GST
Standard Chartered Bank 1%-5% of the principal outstanding+GST
Axis Bank NIL
Kotak Mahindra Bank 5% foreclosure charges + GST on principal outstanding.
YES BANK NIL-4% of the principal outstanding
IDFC First Bank 5% on the principal outstanding amount
IDBI Bank 2% of the outstanding balance

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