Prepayment of Personal Loan: Meaning, Benefits, Charges & Process
- What is Personal Loan Prepayment?
- Types of Prepayment of Personal Loan:
- Partial Payment Vs Foreclosure
- Personal Loan Prepayment Process
- Advantages of Repaying the Personal Loan Early
- Factors to Consider Before Prepaying Personal Loans
- Personal Loan Prepayment Charges
- Steps for Partial Prepayment of Personal Loan
- Mistakes to Avoid When Making a Prepayment
- Pay Back Your Loan Smartly with Hero FinCorp
- Frequently Asked Questions
Mr. Anand Sachdeva just received his year-end bonus from his company. Instead of utilising the entire money, he wanted to clear a certain amount of his personal loan.
This is known as prepayment of a personal loan. When borrowers make payments of a certain amount or the full outstanding amount of their personal loan before the stipulated duration is over, they make a prepayment to get rid of their liability sooner.
It is essential to understand what is personal loan prepayment, the kind of charges involved, and whether you should go for partial prepayment or full foreclosure.
What is Personal Loan Prepayment?
Prepayment meaning is simple - it is the payment of your loan either partially or in its totality before the repayment tenure comes to an end.
Prepayment differs from your usual EMI payments as EMI is a combination of principal as well as interest which needs to be paid every month towards the loan. Prepayment only reduces your principal amount.
Types of Prepayment of Personal Loan:
- Partial Prepayment - In this, you make the payment towards your outstanding principal amount, along with your EMIs. Based on lender policy, your EMI will be lowered, or your tenure will be reduced.
- Full Prepayment or Foreclosure - In this, you pay off your full outstanding loan amount before the end of the tenure of the loan.
Partial Payment Vs Foreclosure
| Basis | Partial Repayment | Foreclosure |
|---|---|---|
| Loan status | Keeps running | Completely closed |
| Outstanding amount | Lessens | Brought down to zero |
| EMI payment | May lessen or duration may become less | None |
| Saving in interest | Moderate | Maximum saving |
| Suitable for | Borrowers having extra money | Borrowers able to repay the full loan |
| Fee charge | Depends upon the lender’s policy | Depends on the foreclosure policy of the lender |
Personal Loan Prepayment Process
Personal Loan Prepayment process is simple:
Step 1 - Calculate your outstanding loan amount.
Step 2 – Understand the eligibility and the conditions for prepayment.
Step 3 – Check personal loan prepayment charges, if any.
Step 4 - Submit the request for the same through the lender’s website/app/customer support.
Advantages of Repaying the Personal Loan Early
Borrowers can save the interest component after paying off the principal in advance. The benefits of loan prepayment are:
- It reduces the burden of your loan liability and decreases the principal amount.
- You have the leverage to preclose your loan - partially or fully.
- You can reduce your monthly EMI/tenure.
Factors to Consider Before Prepaying Personal Loans
Before making the decision, consider the following factors:
- Check personal loan prepayment charges.
- Check if there is a lock-in period for your loan.
- Check if the interest savings exceed the applicable charges.
- Avoid using your emergency fund for prepayment purposes.
- Check if you can earn more from other investments using the savings.
Personal Loan Prepayment Charges
Personal loan prepayment charges could be levied on a customer when he makes an early payment of the loan amount before the end of its tenure.
This fee depends on the loan agreement and the applicable conditions. You may verify the same through the repayment schedule of the loan through Hero FinCorp.
The Impact of Partial Prepayment on EMI and Loan Tenure
When you partially prepay your loan, your outstanding principal amount becomes less than what was initially agreed upon. The lender may:
- Decrease your monthly EMI without changing the loan tenure.
- Decrease the loan term without changing your monthly EMI.
- Bring down the overall interest charged over the term of the loan.
Example
Mr. Anand Sachdeva had taken a personal loan and paid INR 75,000 from a bonus he earned at work towards his loan.
He got a notification from the lender that the monthly EMI amount has reduced from INR 15000 to INR 12500.
By repaying his loan within a few months, he managed to bring down the EMI amount and enjoy a better cash flow throughout the month.
Steps for Partial Prepayment of Personal Loan
Step 1 – Use a personal loan EMI calculator to manage the outstanding loan balance.
Step 2 - Check your eligibility and the charges that apply.
Step 3 - Fill out the prepayment form.
Step 4 - Pay through an authorised channel.
Step 5 - Check the revised repayment schedule or closure form.
Mistakes to Avoid When Making a Prepayment
Here are the mistakes to avoid when making a prepayment:
- Neglecting any applicable prepayment charges.
- Using your savings for paying the loan.
- Not comparing the savings you could make on interest against investment returns.
- Ignoring the terms and conditions of the lending institution.
- Not obtaining the revised repayment schedule or loan closure form.
Pay Back Your Loan Smartly with Hero FinCorp
Understanding prepayment meaning, and its benefits will help you in making better loan-related choices. However, make smart choices and always assess the cost incurred, savings in interest payments, and other related considerations.
In case you are considering a borrowing need, you can consider Hero FinCorp Personal Loans, see whether you qualify, check the documents required for personal loans, and apply conveniently using the Instant Loan App.
Whether it is unsecured loans, a loan for marriage, a loan for travel, or even a personal loan for students, a good repayment plan helps you manage your finances better.
Frequently Asked Questions
What is personal loan prepayment and how does it relate to personal loans?
Prepayment of personal loans means making an early payment of a portion or the full amount of a personal loan that is yet to mature.
What is the difference between prepayment and foreclosure?
Prepayment means clearing just a portion of the outstanding loan balance, while foreclosure means the full repayment of the outstanding balance.
Do all financial institutions allow borrowers to repay personal loans before the end of the tenure period?
Most lenders offer such flexibility to their borrowers if the eligibility criteria are fulfilled and if there is no lock-in period specified in the loan agreement.
What are personal loan prepayment charges?
Personal loan prepayment charges are the fee levied by the lenders when borrowers prepay their personal loans before the tenure period ends. Such charges are specified in the loan agreement.
Disclaimer: The information provided in this blog post is intended for informational purposes only. The content is based on research and opinions available at the time of writing. While we strive to ensure accuracy, we do not claim to be exhaustive or definitive. Readers are advised to independently verify any details mentioned here, such as specifications, features, and availability, before making any decisions. Hero FinCorp does not take responsibility for any discrepancies, inaccuracies, or changes that may occur after the publication of this blog. The choice to rely on the information presented herein is at the reader's discretion, and we recommend consulting official sources and experts for the most up-to-date and accurate information about the featured products.
