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Do’s & Don’ts of Repaying Your Personal Loan Early

Highlights

  • When should I do personal loan prepayment?
  • How much can I save on prepayment - Read all these and more here

A personal loan is popular as it helps you meet your needs instantly. The loan amount can be used to buy consumer durables, ensure a glorious wedding, for health treatments, or even planning a vacation. Both banks and non-banking financial companies (NBFCs) are busy offering personal loans to applicants in India. Personal loans come with a comparatively higher rate of interest because they are given without any collateral. However, you can reduce the burden by going for personal loan prepayment. It is nothing but the payment of the loan before the original tenure. This saves you from paying more interest to the lender. But many exercise this option without putting much thought into it and end up cursing later on. We hope you don’t face such a situation.

So, if you are servicing personal loan EMIs somewhere, you must know the do’s and don’ts of repaying the personal loan early. If you don’t know the do’s and don’ts of paying a loan before the scheduled time, this post is for you! Read and implement it in real-time.

Let’s Start with the Do’s

Paying the loan before the scheduled time will require proper due diligence and adequate savings. Let’s check out these in detail below.

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Do Check the Personal Loan Statement

Before you do a personal loan prepayment, you should check the loan account statement to know how much you’ll need to pay? What amount have you paid? How much will you save after prepayment? Where do I get the loan account statement? You can get your loan account statement by going to the bank branch. Or you can either access your loan account statement online using the net banking facility. Log in to your account, enter the loan account number and check the statement online.

Do Check the Prepayment Fee

Always check the charges the lender levies on personal loan prepayment. The prepayment charge can range from 1%-5% of the loan balance amount, although it may vary from one lender to another. If the prepayment fee is low and you think that you can manage it to pay with the loan balance then you should proceed with the prepayment. Otherwise, you must check the savings you’ll have after the prepayment if the prepayment charge is high. If you don’t see substantial savings after factoring in the prepayment charges, there’s no point in paying off the loan before the scheduled closure.

Do Set Savings

Save from your monthly income and utilize it later for the prepayment. It can help you build a savings habit and may reduce your loan payment as well. You can do a fixed deposit or recurring deposit of your saving amount for a short term so that you can use it for personal loan prepayment. Having the loan paid off before could help you tackle situations like a job loss or a medical emergency better.

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Now Focus on to the Don’ts

It is important that prepayment fetches you enough savings else there’s no gain in using your hard-earned money towards the same. Here’s what you need to avoid doing when planning a prepayment.

Don’t Do Prepayment When the Loan is a Few Months or a Year Away from its Maturity

You must know the aim of prepayment as it is to save on the interest payment. And if you do prepayment just a few months before the loan maturity date then there will be negligible savings. So, if you have availed a personal loan for 5 years just now, look to prepay within 2-3 years. That’s the ideal prepayment. If you fail to do so and the loan has completed around 4 years, avoid doing a prepayment unless you feel the income situation is not going to be good ahead.

Don’t Use Your Entire Savings to Pay Off Your Loan

Doing savings regularly and in a planned manner can help you achieve more goals than one. So, when you are saving for prepayment, ensure you do savings for other purposes too. The agenda is clear – savings should be made for goals beyond personal loan prepayment. You can’t compromise your other goals just for the sake of personal loan prepayment. This might require changing your normal routine, but you should adhere to the same. Use different savings and investment tools for achieving different financial goals.

Savings on a Personal Loan Prepayment

You can save a lot on the interest payment if you do prepayment early during the repayment tenure. Usually, a personal loan is locked in for about one year after which you can pay the outstanding amount. See the example below to understand prepayment better.

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For example, if you borrow INR 5 lakh at an interest rate of 15% per annum for 5 years, the monthly EMI comes out as INR 11,895. The total interest liability will be INR 2,13,698 for 5 years. But you can reduce interest outgo by doing a prepayment. At the end of the 1st year, you would have paid INR 72,596 towards the principal amount and INR 70,143 as interest. If you decide to prepay the full amount after 1 year of payment, you need to pay INR 4,27,403 by which you’ll save up to INR 1,43,555 on interest outgo. The table below will show you the amount you need to pay at the end of each year till 4 years and the interest you are likely to save at these intervals.

Repayment PeriodPrincipalInterestOutstanding Loan Balance at the End of Each Year Till the End of 4 YearsSavings on Prepayment After the End of Each Year till 4 Years (2,13,698-Interest Paid Till Every Year)
Year 1INR 72,596INR 70,143INR 4,27,403INR 1,43,555 (2,13,698-70,143)
Year 2INR 84,266INR 58,473INR 3,43,137INR 85,082 {2,13,698- (70,143+58,473)}
Year 3INR 97,812INR 44,927INR 2,45,324INR 40,155 {2,13,698- (70,143+58,473+44,927)}
Year 4INR 1,13,536INR 29,203INR 1,31,788INR 10,952 {2,13,698- (70,143+58,473+44,927+29,203)}

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