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Is it beneficial to prepay your Personal Loan?
By Anupama Deshpande | May 06, 2018

When you have an urgent need of money to meet your personal expenses, you can opt for a Personal Loan from a bank or an NBFC. Personal Loan is a short term borrowing. It is a type of unsecured loan which means that you don't need to deposit any security to get a Personal Loan.



The interest rate charged on a Personal Loan is higher than that in case of other loans such as home loan, car loan, business loan, gold loan, etc. The reason behind higher rate of interest is that this loan is an unsecured loan and it is not given against any collateral & therefore, the lender doesn't have any security in case of default made by the borrower.

Understanding Prepayment of Personal Loan

Majority of banks and other lenders allow the borrowers of Personal Loan to repay the whole or part of the outstanding loan amount before its tenure. Some of the banks or NBFCs allow the prepayment only after certain number of repayments of original loan. Some of the lenders do not allow part payment of Personal Loan.

Prepayment of the Personal Loan is beneficial for the borrowers as it saves the interest charge in future for them but it is not good for the lenders as they receive the loan amount before completion of original tenure and hence they won't be earning interest for the remaining tenure. That is why lenders levy a prepayment or part payment penalty to the borrowers. If the personal loan is foreclosed then the foreclosure or prepayment penalty is charged by the lenders, which usually ranges from 1% to 2% of the outstanding loan amount. Banks may charge even more than that.

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Difference between Part-Payment and Pre-Payment of Personal Loan

Pre-Payment of Personal LoanPart-Payment of Personal Loan
Paying back the entire amount of the personal loan before the original tenure endsPaying back a part of outstanding amount of the personal loan before the original tenure ends
Majority of banks allow to make pre-payment of loanSome banks do not allow part-payment at all
Personal loan generally can't be pre-paid before completion of one yearYou pay back the principal amount primarily
Lenders generally ask you to pay a certain number of EMIs before prepaying the loanYou can pay between 2 to 5 times of your EMI value once a year
Loan account is foreclosedLoan account is not closed
Pre-closure penalty is leviedEMIs or loan tenure gets reduced after part-payment of loan
Penalty of pre-closure ranges from 1% to 5% of the outstanding loan amountPart-payment penalty is very minimal or nil

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Is it beneficial to prepay your Personal Loan?

Yes, of course, it is beneficial to prepay your personal loan. As we know that the rate of interest charged on a Personal Loan is very high but people go for personal loan as it is considered the fastest way to fulfil the immediate requirements for money and further, no security is required to avail this type of loan. It is very easily and quickly available. If the pre-payment is done at relatively early stage of the Personal loan then it becomes most beneficial as you can save a lot on the interest part

The Reserve Bank of India (RBI) has already issued directions to the banks to stop charging borrowers any pre-closing penalty, if the loan is based on floating interest rate. If the personal loan is taken on a fixed rate of interest then they are free to charge pre-payment penalty.

If the borrower has idle cash which is kept in bank or is earning less than the interest being paid on personal loan then it is very beneficial for him/ her to pre-pay the Personal Loan entirely or partially as the case be, so that a lot can be saved on interest part.

Further, full pre-payment is considered successfully closing your loan account which in turn positively affects your credit score. Part-payment of loan does not have any impact on your credit score but if you make part-payment of your personal loan it certainly reduces your interest burden and you will definitely find yourself in a position to successfully pay your loan during original tenure of the loan.

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About Anupama Deshpande
Anupama is a Co-Founder of CodeForBanks.com. She is an MBA (Finance) and Chartered Financial Analyst (CFA). She also carries a Fellowship degree in Life Insurance Sector and is a Master of Computer Application (MCA). She is an expert in Finance Field with an experience of over 18 years on different managerial positions in finance industry including Stock Market, Depository and Mutual Fund Sectors. Apart from that she has remained for few years in the field of marketing as well. Her suggestions and advice for investments have been very useful to many people.
Her vast interest & expertise in the field of finance have encouraged her to write the articles so that others can also get benefitted out of them. She never loses any opportunity to learn and be creative. She is a valuable asset for CodeForBanks.com & important resource to all those around her.

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