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What are prepayments?

Pre-paying one’s personal loans simply refers to repaying the loan (either partially or completely) before the designated due date. Pre-paying your personal loan can lift the burden of debt off your shoulders. Let’s walk you through personal loans with a prepayment option.

Benefits of Personal Loan with prepayment option

There are several benefits in case you wish to pre-pay your personal loan. A few of them are mentioned below:

  • Be debt-free quicker: Paying off your part of the loan would help you in the reduction of the amount of your personal loan EMI.
  • The reduced outflow of interest: This is helpful when your personal loan comes with a reducing balance rate. Here, the part-payment towards your loan amount gets deducted from your principal and interest is thereby calculated on the balance amount. Thus, this reduces the interest applicable and is more beneficial than a personal loan with a flat rate of interest. Either partial or full prepayment of your outstanding loan amount will definitely decrease your interest outgo.
  • Improved CIBIL score: Paying your loan debts in advance indicates that you are financially prudent and can repay your debts in a timely manner. As you prepay your loan in advance, this reflects well on your CIBIL score, as a result, it can help you avail of future credit easily at attractive interest rates.
  • Better FOIR: Prepaying your loans will have a great impact on your FOIR (Financial Obligations to Income Ratio). Your FOIR measures the amount of monthly income being utilized to pay off one’s monthly financial obligations. With your personal loan debt payments out of the equation, your FOIR will see a significant reduction. This, in turn, will help you avail of larger loans with competitive interest rates.

Types of Prepayments

There are two types of prepayments one can make towards their personal loan. These are partial and full prepayments. Here, we examine both types:

1. Partial Prepayment of Personal Loan

If your finances do not allow you to prepay your debt completely, you can partially prepay your personal loan. An advantage of a part-payment towards your debt is that it does not need to be done just once. This means that regular pre-payments of lump sum amounts towards your personal loan can be done as per your financial convenience. However, consider the pre-payment charges if you are planning to make multiple partial prepayments towards your loan.

2. Full prepayment of Personal Loan

On the other hand, when you have adequate finances you can simply pre-pay your personal loan in a single installment. You can prepay the complete loan amount even in the later stages of your loan tenure if your finances allow you to do so. Again, you must review the charges associated with this.

Charges Involved in The Prepayment of Personal Loan

If you opt to prepay your loan amount, the interest that the lender will earn over the loan tenure will drastically decrease. Hence, lenders charge penalties while doing the prepayment to make up that amount. These charges are generally levied as a percentage of the outstanding loan amount and may also include taxes applicable.

 

Generally, these charges range between 3-5%. In 2014, the Reserve Bank of India (RBI) had mandated that banks refrain from levying charges on the prepayment of a loan. Additionally, the RBI has recently asked NFBCs to stop charging prepayment penalties on personal loans. This, however, only applies to loans with floating-rate interest charges.

 

It is advised to prepay your personal loan in the initial stages itself whenever you find yourself capable of the same. In the long run, prepaying your personal loan significantly helps you strengthen your candidature for future loan applications and overall, improves your finances. Hence, if you want to go ahead with prepayment of a personal loan have a word with your lender to discuss the charges involved. You should ensure that your lender discloses the prepayment charges, if any, upfront. Ensure that you are not subjecting yourself to any hidden fees and charges.

With the Personal Loan on Bajaj Markets, all fees and charges are levied in a completely transparent manner. Charges are disclosed to you well in advance, to give you the chance to make an informed financial decision. Moreover, the personal loan on Bajaj Markets comes with a host of benefits. Your online application will be approved online within minutes and the loan amount will be disbursed in your bank account in no time! You are offered competitive interest rates, flexible repayment tenures, and other value-added services.

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