Are There Any Prepayment Charges on Personal Loans?
5 min read | 2 months ago
Are you looking for personal loans to meet any sudden expenses? You can opt for either short or long term personal loans to cover these costs. Personal loans are popular for their quick processing, easy application procedures, minimal documentation, hassle-free sanctioning, and competitive rates of interest. You can flexibly choose your loan tenure and repay debts comfortably without any hassles.
Now, consider a scenario where you are thinking of repaying your loan well before its concluding date. In this case, you should always keep the prepayment charges in mind. Here’s a guide to the same along with some of the key aspects of personal loans in this article.
Key Features of Personal Loans
Flexible fund usage- Personal loans do not come with any limitations as to how you use these funds. You can use them for any requirement, including wedding costs, higher education expenditure, medical emergencies, home renovation and repairs, buying gadgets, and more.
Fast disbursals- Personal loans are usually disbursed swiftly by lenders if you meet the eligibility criteria in terms of your credit score and income. Approvals can be given almost instantly online, while disbursals may require only 24-72 hours in most cases.
Minimal documentation- Personal loans do not require prolonged and extensive documentation like home loans or car loans. You can upload scanned copies of your KYC and income proof documents and submit them to the lender.
Zero collateral loans- Personal loans are unsecured loans, meaning they do not require any security or collateral.
Convenient repayment options- You may easily repay your personal loan by choosing a convenient tenure and paying EMIs via online payments or post-dated cheques.
Competitive rates of interest- Personal loans come with highly competitive rates of interest these days, making them good choices for raising funds at short notice.
Now that you have an idea of the key features of personal loans, here’s looking at prepayment charges and what they entail.
What are Prepayment Charges?
Prepayment means repaying a loan before the due date or loan period. Banks and financial institutions charge a fee to offset their losses on account of early repayment. This is known as the prepayment charge. Once the customer prepays the loan, the total interest for the remaining period is reduced, resulting in this charge to cover the loss of potential future income.
Do Personal Loans Have Any Prepayment Charges?
Prepayment means repaying a loan before the due date or loan period. Naturally, banks and financial institutions charge a fee to offset their losses on account of early repayment. This is known as the prepayment charge levied by banks in this case. Commercial Banks and usually earn the difference in the amount between the total loan cost (principal + interest) and the principal amount throughout the loan tenure. Once the customer prepays the loan, the total interest throughout this extra period comes down as a result. Hence, this is where banks charge this fee to cover the loss of their potential future income.
Should You Prepay Your Personal Loan?
You should prepay your personal loan, depending on your financial circumstances and goals. The biggest benefit of prepaying your personal loan is the massive interest costs that you stand to save. For instance, consider how a personal loan of Rs. 10 lakhs at 13% per annum with a five-year tenure will have an EMI of approximately Rs. 22,753 per month. The interest cost will be Rs. 3.65 lakhs in total and if you repay the whole loan after a year, then you will end up saving a whopping Rs. 2.44 lakhs in interest throughout the loan period.
It is not always that you should prepay the personal loan in the early stages of the loan to save on interest costs. You can also make payments in the later stages to save on total loan costs. You can use online calculators to work out the total savings that you stand to gain from prepayments. However, deduct the prepayment charges from your savings to find out your net benefits and whether they merit prepayment before the expiry of the loan period.
Of course, what prepayment does is lower your overall debts and this will help you take oans more easily later on. Your credit mix is also taken seriously by banks and a lower proportion of unsecured loans is always desirable. Hence, work out the pros and cons accordingly before choosing a prepayment strategy.
Conclusion
Personal loans come with prepayment charges, so review these costs before clearing the loan early. Prepayment can be an effective way to reduce debt and lower the proportion of unsecured loans in your financial portfolio.
FAQs
1.Can I prepay my personal loan anytime?
Check with your lender if there is a minimum period initially when prepayments are not allowed. Otherwise, you can prepay the loan anytime by paying the requisite charges.
2.How much of a personal loan amount can I apply for?
Banks may sanction anywhere between Rs. 1-10 lakh, depending on your eligibility. Apply as per your repayment ability and income.
3.Can I use a personal loan for wedding costs?
Yes, you can use a personal loan for any purpose, as long as you are eligible for the funds.
About Unity Small Finance Bank
Unity Small Finance Bank is committed to making banking simpler and more accessible for everyone. Our services include Savings Account, NRI account, Current Account, Fixed Deposits, and Personal Loans offering flexible tenures and attractive interest rates. We also offer financing options like MSME Loans and Microfinance to support businesses and underserved communities. Learn more about Unity Small Finance Bank here.
