What is the right time to prepay your personal loan!

By BankBazaar | December 25, 2012

The personal loan has become a popular tool that is used by many people to raise additional cash when in tight corner or when there is an urgent requirement of money at a short notice. However in most cases the situation does ease off after some time and the burrowers are in comfortable position pay back the loan availed by them. That is the time when most people land up in a dilemma about prepaying their outstanding loans. There are several issues associated with prepaying personal loan before its complete tenure. The banks and other financing institutions often discourage this kind of termination of a personal before its term is fulfilled as they stand to lose out on the anticipated interest on the balance amount till the agreed period of the personal loan.

Implications of Prepayment of a Personal Loan

There are differing views on the actual implications of prepaying personal midway between the tenure. It must be remembered that a personal loan being unsecured inherently has a high interest rate. Thus whenever possible it should be liquidated at the earliest to avoid continuing payment huge interest on the loan amount.

However the problem arises when the customer is told by the bank that even if he wants to prepay the personal loan he has to abide by a few regulations stipulated by the bank for the same. The most common of these regulations are:

  • In most cases the prepayment of a personal loan is not permitted before a minimum period of 6 months following the disbursement of the loan.
  • Secondly even when one wants to prepay after 6 months of taking the loan, the banks will charge a prepayment penalty of 2-5% on the amount outstanding at that point of time to make good some of the losses that they stand to incur by not getting the planned interest on the loan right up to the decided period.

Timing the Prepayment of Personal Loan

The individual is at liberty to prepay a personal loan any time after the first 6 months for which he has to pay some penalty. The factors affecting this timing are:

  • It is preferable to pay up a personal loan in the initial stages when the repayment has been done for less than one year. In such cases the actual amount saved from avoiding of interest is higher than for loans which near the end of the tenure.
  • Quarter ending and financial year ending are some of the times when the bankers are likely to waive some amount of penalty on prepayment to accommodate the customer.
  • In case the burrower is likely to take a larger loan such as a car loan or a home loan from the same financier then the penalties can be reduced to a great extent in hope of continuing the relationship.
  • Personal loan customers should try to liquidate such high interest loans wherever they have some additional cash available even if they have to pay a penalty since the amount paid as penalty may still keep the total cost lower as compared to paying interest right till the end of the tenure.

One needs to do the exact calculations prior to making the prepayment regarding the total savings made on interest for a longer period. Prepayment is also helpful in keeping a good credit record that comes handy while applying for other forms of credits and loans from the same or other banks.

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