A Personal Loan is like a friend in disguise that offers you monetary assistance unconditionally. We don’t mean it comes for free, but perhaps the best advantage of a Personal Loan is that it is available for almost anything under the sun. This makes it a loan worth applying for.
This secured retail loan is offered by nearly all public sector and private banking institutions in the country at pleasing rates and terms and is easily accessible, not to mention affordable. A term-based loan that lets you pay back as you wish in equated instalments of your choice (EMIs) along with applicable interest charges, you can avail one for business and personal reasons. We consider a Personal Loan when we’re strapped for cash to fulfil a particular requirement. A few months or perhaps a year into the loan, we may decide to pay off the balance amount due and close the account with a view to be free from debt and to save on interest charges.
Whilst this is a sound financial decision, there are some hacks you must consider before deciding to visit the nearest branch to prepay your Personal Loan.
Get a Payoff Amount
Most Personal Loans are billed using interest charges on reducing balance basis which means rates are applied to the principal amount on a daily basis as you continue paying off the loan every month. Before preparing to pay the outstanding balance and close the loan account, call the bank’s customer service wing to get the payoff amount (outstanding principal value plus interest charges) as of a future date (the day when you’re likely to pay the bank) to make sure you have details of the financials involved. This task also helps in arranging the required amount.
Details of the payoff value can also be obtained at the designated branches in the form of a statement copy (amortization) along with a breakup of the amount along with penalties (if any).
Negotiate Prepayment Charges
Perhaps the most hated term for borrowers who want to close their loan account – pre-closure charges – is an amount charged by the bank (percentage of the principal amount) as a penalty for paying off the loan before the actual end of term to compensate for the early closure. As a well-informed borrower, try to negotiate this fee before signing the contract or talk to a representative for a waiver or reduction before making the final payment. This amount can cause some heartburn if the principal outstanding is high.
Consider Paying Off Early During the Term
If you’re contemplating paying off the loan later in the tenure, reconsider your decision since you’re mostly paying off the principal value whilst most of the interest charges have already been cleared with the EMI payments made thus far. You may rather consider the option of continuing with the monthly payments since you are just paying the borrowed amount. This logic applies to loans taken out on the basis of reducing balance.
Check Credit Reports
After paying off the loan, file away the relevant documents such as the NOC or the loan closure letter that is received from the bank. You will receive these documents no later than about 15 days from the time of final payment. If you’ve provided PDCs (Post Dated Cheques) they will either be returned by the lender or their destruction will be confirmed via a formal letter.
Since most of the banks report monthly payments to credit bureaus, they are required to report the loan closure to the agencies within a stipulated time. In about 60 days from the official closure date, pull out a copy of your personal credit report from a reputed agency such as CIBIL to confirm the entry. If you find any discrepancy, contact the bank immediately for correction. You can also consider reporting the error with the credit agency.
Additional reading: Common Personal Loan mistakes