Personal Loans offer various benefits such as quick loan processing, zero collateral requirement, no end-use restrictions, and ample loan amount. However, the absence of security attracts higher interest rates, depending on the applicant’s credit rating, income, financial obligations, and other crucial factors. While prepayment is not the most critical aspect of taking a loan, it’s always good for borrowers to be aware of all their options.
Know what these charges are and why finance companies charge them when borrowers prepay their loans.
What are Personal Loan Prepayment Charges?
The following example will make understanding the pre-closure charges for Personal Loans easier.
You have been servicing a loan for the past year, while your loan tenure is three years. Now, if you decide to wholly or partly pay off the outstanding balance, the lending institution will charge a certain prepayment amount, based on the loan size and type.
The Personal Loan prepayment charges vary based on the lending institution and the principal amount. Nevertheless, additional charges are applicable when you prepay the outstanding amount in full to close the loan account. Hence, understanding all the related costs is vital before prepaying the loan.
So, prepayment charges are additional fees lending institutions charge if the borrower opts to pay off the loan early. Every personal loan has a specific loan tenure that the borrower selects at the time of borrowing. The borrower agrees to pay the loan amount within this period in equated monthly installments (EMIs). However, if they want to pay off the loan earlier, they must pay the pre-closure charges for the Personal Loan according to the lending institution’s policy.
Why Do Lending Institutions Levy Prepayment Charges?
Every loan is given out for a stipulated tenure, and essentially, financial institutions are taking a risk by rolling out finance from their pockets. Let’s be clear: it’s business and profit is the reward these institutions get for taking a risk. For the same, they levy and divide their interest charges accordingly. When a borrower opts to pay off the loan faster, the finance company stands to lose money but does not want to put the borrower in a tight spot either. As a form of settlement, they levy Personal Loan pre-payment charges for early loan closure. Although these charges are nominal, it’s best to go for prepayment if you have surplus cash or your financial situation allows it.
How to Calculate Prepayment Charges?
The pre-closure charges for Personal Loans vary depending on how the financer calculates them. This involves a certain percentage of the principal amount and the personal loan prepayment charges are then calculated as a part of that. Some lenders allow only for part prepayment of personal loans, and that too for a limited number of times, usually only once a year.
The best thing to do is get in touch with your loan manager and assess the best pre-closure options for yourself. Even an online loan calculator can be used.
Don’t miss doing the calculation before paying off a personal Loan early. If you’re almost at the end of the loan term and want to pre-close the loan, compare the pre-closure charges for a personal loan with the remaining interest amount. In some instances, continuing with the EMI payments is more beneficial than paying the prepayment charges.
Prepayment charges are fees charged by lenders to borrowers who pay off a loan before the end of its term. These charges are meant to compensate lenders for the interest income they would have earned had the loan not been prepaid.
The calculation of prepayment charges can vary depending on the terms of the loan agreement and the applicable laws in your jurisdiction. Here are some general steps to calculate prepayment charges:
- Review the loan agreement: The loan agreement should specify the prepayment terms, including any charges or penalties that may apply. Look for the prepayment clause and any specific formulas or tables used to calculate the charges.
- Determine the prepayment amount: Calculate the total amount that you wish to prepay, including both the principal amount and any interest due.
- Determine the applicable interest rate: Identify the interest rate that applies to the prepayment period. This may be different from the interest rate that applied to the original loan.
Read More: A Comprehensive Guide to Loan against Commercial Property
About the Author
Amaira Sharma is finance expert and former business growth strategist who has more than 8+ years experience in the industry, now she helps others to get better financial stability and standards. She loves to write useful tips on personal finance and businesses.
Author Bio
I am Priya Varma, and I have been working as Content Writer at Rananjay Exports for past 2 years. My expertise lies in researching and writing both technical and fashion content. I have written multiple articles on Gemstone Jewelry like turquoise ring and other stones over the past years and would love to explore more on the same in future. I hope my work keeps mesmerizing you and helps you in the future.
