Prepayments are always helpful while ordering products online or booking tickets for movies, airline or train travel. It saves the last-minute hassle of handling cash or card for making payments. While it is beneficial in most cases, the same is not always advantageous for Personal Loan prepayment.
Over the years, Personal Loans have become so popular and easy to avail of, especially online Personal Loans. These loans can be used for any individual financial need. Prepaying a Personal Loan entails paying back the total amount borrowed before the loan’s term has run its course.
Foreclosure fees are assessed by the lender and must get paid to make prepayments. Depending on the lender, these fees range from 0% to 5%. Therefore, prepaying a Personal Loan early in the term will be most advantageous. Prepayments are not permitted during the lender-imposed minimum lock-in term. Prepayments allow you to either shorten the loan’s term or lower your EMIs.
In most circumstances, prepaying a Personal Loan is advantageous for borrowers; however, to make an informed decision, borrowers should first do a thorough cost-benefit analysis. Therefore, the advantages and disadvantages of prepayments are the most important things to consider before making the final decision.
Advantages of Personal Loan Prepayments
- Faster Debt Repayment – The amount you must pay to be debt-free increases with the length of your loan’s term. It is usually preferable to pay back the loan as soon as possible because of the direct relationship between the amount to be repaid and the duration. In addition, the prepayment cost levied is smaller than repayment amounts with longer tenures. Personal Loan prepayment speeds up your debt elimination process and lowers your EMIs.
- Lowered Interest Rate – Prepayment of Personal Loans must be considered when the lock-in term established by the lender expires. The interest rate on the balance of the loan is reduced after repayment. Compared to the money you save from lower interest rates, prepayment fees are less expensive.
- Improved Credit Score – You can reduce your debt by repaying the loan in whole or part. Your credit score rises as your loan amount drops and falls as your loan amount increases. Prepayment thereby raises your credit score by reducing the loan balance.
Disadvantages of Personal Loan Prepayments
1. Prepayment Fee Charged by the Lenders – The lenders charge a specific fee for prepayment of Personal Loans called foreclosure charges. This fee is charged only if you wish to pay before the tenure of your loan is completed. The fee charged ranges from zero to five per cent of the loan amount and depends from lender to lender. It includes foreclosure charges, administrative charges, and other fees.
2. Depletion of Cash in Hand – Prepayments mean a reduction in liquid cash. Prepayments can lead to distress if it affects your daily cash requirements. Therefore, you must balance out your finances and go through the process of prepayments of Personal Loans if you have extra cash.
To conclude, one of the most popular types of loans is the Personal Loan. It is becoming increasingly popular due to its many benefits, including simple applications, limitless application options, collateral-free use, and many more. Although Personal Loans are among the most expensive loans to take as they have incredibly high-interest rates, their easy availability makes them the most popular.
Prepayment options are also available with best online personal loans. As already indicated, there are advantages and disadvantages to prepayment. Borrowers must carefully weigh the advantages and disadvantages of prepayment of Personal Loans before deciding to pay them off. Users who want to cut their EMIs, loan terms, and interest rates will find it an appealing solution. It is also wise if you wish to eliminate your debts quickly.
These advantages come with a high fee known as the foreclosure charge or prepayment fees, which vary from lender to lender. Additionally, prepayments should not be chosen by borrowers who have little liquid cash or other plans for their liquid money because they significantly deplete liquid cash.
To sum up, you must weigh the benefits and drawbacks of early repayment of Personal Loan to choose what is best for you and develop the most advantageous financial plan.