Pre Closure Charges for Personal Loan
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What is Personal Loan Prepayment?
When you take a personal loan from a bank or an NBFC, you select a convenient repayment tenure based on your income, monthly expenses and other factors. Personal loan prepayment means repaying the loan amount, partially or in full before the loan term ends.
Borrowers usually do this when they have some extra money at their disposal, say they got a bonus from their workplace or their FD matured, and they want to use the money towards paying off their loan.
Personal Loan Prepayment Fees & Charges
Prepayment personal loan charges, also known as foreclosure charges are levied to cover for the loss of potential interest income that a bank or NBFC would have earned had the borrower repaid the loan over the entire term.
Every loan company has different policies regarding personal loan pre-closure charges. It is usually between 3% and 6% of the remaining balance on the loan. Some lenders like Zype charge no additional fee on personal loan prepayment. If you borrow money from Zype, you can pay off your loan before the tenure without any additional charges.
How to Calculate Loan Foreclosure Charges?
You wouldn’t need to calculate charges on prepayment personal loans if you get a loan from Zype since we don’t levy any foreclosure penalty. For other lenders, you will need to check the loan agreement and see if they charge a flat fee or a percentage of the outstanding loan amount. You can also reach out to your lender via call or email to get more clarity on how to calculate personal loan pre-closure charges.
You should consider all the factors and weigh the pros and cons before making the decision on personal loan prepayment. The major benefits are that you could save interest charges on the outstanding loan, your debt will be reduced and personal loan prepayment can positively impact your credit score.
Benefits of Pre-Closing Your Personal Loan
You can save money by paying off loans in advance and reducing overall interest costs.
Early repayment reflects responsible financial behaviour. This can improve your creditworthiness by increasing your credit score.
If you pre close your loan, you will free yourself from the burden of EMI payments.
Your debt-to-income ratio will reduce which could increase your chances of loan approval for a higher limit.
Disadvantages of Pre-Closing Your Personal Loan
Prepayment Penalty
Since loan companies lose future interest income when you pre close your loan, they levy personal loan pre-closure charges to offset their loss. The penalty amount can reduce the savings you would enjoy from prepaying your loan.
Less liquidity
In case you use your savings or emergency fund to prepay your loan, you might find yourself under financial stress in case of an unexpected financial emergency. You should plan your finances well before making decisions related to prepayment.
Should You Pre-Close Your Personal Loan or not?
One of the biggest drawbacks of this step could be the foreclosure charges you might need to bear to pre-close your loan. You should also think if this is the best possible use of the surplus money you have or if using or investing it elsewhere would be more beneficial.
Alternatively, you can also pay off a certain amount of your loan in advance to reduce your EMI amount. It is advisable to use a personal loan prepayment calculator and plan accordingly.
Process of Personal Loan Preclosure
If you have taken a personal loan from Zype and want to prepay the same, open the Zype instant loan app and tap on the ‘Account’ section in the bottom-right corner of the screen. Now tap on “Pay Now” and enter the amount you want to pay to complete the prepayment process. You will get the confirmation of the payment you have made.
Frequently Asked Questions
Is It Good To Foreclose Personal Loans?
Foreclosing a personal loan could reduce your interest cost and give you peace of mind but you should never empty your savings as it could negatively affect your finances.
What Happens When You Prepay A Personal Loan?
When you pay off your loan amount before the loan tenure, the lender might or might not levy foreclosure charges on you. You might be able to significantly reduce your interest cost by prepaying your personal loan.
Does Prepayment Of Personal Loan Reduce Emi?
When you prepay your personal loan, the outstanding loan amount decreases which could reduce your upcoming EMI amount.
Does Personal Loan Prepayment Reduce Interest Rate?
No, the interest rate levied on the loan remains the same. However, your overall interest cost on a loan might reduce if you foreclose your personal loan.
How Can I Avoid Foreclosure Charges On Personal Loans?
Before you apply for the loan, make sure that the loan company does not charge any prepayment penalty.
How Can I Avoid Foreclosure Charges On Personal Loans?
Before you apply for the loan, make sure that the loan company does not charge any prepayment penalty.
Can Foreclosure Have An Effect On Your Cibil Score?
Yes, foreclosing your loan increases your creditworthiness and could positively impact your credit score.
Is It Compulsory To Pay Foreclosure Charges?
It depends on the loan company’s policies. For example – Zype doesn’t charge any foreclosure charges. You can check your loan agreement for more information.
How Much Are Pre Closing Charges On A Personal Loan?
In India, foreclosure charges usually vary between 3% and 6% of the outstanding loan amount.
What Is The Difference Between Foreclosure And Pre-Closure?
Paying the entire loan amount and closing the loan before the loan term ends is called foreclosure. Whereas, paying an amount which is higher than EMI but not necessarily the entire amount is known as pre-closure.
Can I Close My Personal Loan Within 3 Months?
This depends on the loan company’s credit policies. If you have taken a loan from Zype, you can prepay your outstanding loan amount anytime you want.
How Is A Preclosure Different From A Prepayment?
Preclosure involves repaying the complete outstanding loan amount and closing the loan. Under prepayment, you can repay a partial loan amount.
Why Does My Loan Account Show The Status As 'settled But Not Closed'?
When you don’t pay off the complete loan amount but you make an agreement with a lender to pay a lesser sum and close the loan, the loan account shows ‘Settled but not closed.’