When you need a substantial amount of money for an unexpected expense or an emergency, such as traveling or a wedding, personal loans can be helpful. However, is it wise to continue making EMI payments if you have extra cash on hand to pay off the loan or several EMIs at once?
Loan prepayment or early closure nearly always entails additional fees. In order to make up for the interest amount lost, the lender imposes these pre-closure fees on Personal Loans. If the lender permits it, you can avoid these fees though. Do you need to foreclose on your debt then?
Here are certain circumstances in which it would be wise to prepay your personal loan.
There is no impact on your credit score
In most cases, a person’s credit score is unaffected by foreclosure. Before you foreclose on your loan, it would be best to consult with your lender about this.
The loan is still in its early stages
Your EMIs include a larger interest component than principal at the beginning of your loan term, but the ratio reverses as time goes on. It would be a great idea to foreclose the loan if your EMIs are still in the beginning stages. However, if you were to foreclose it later, you might have to pay the lender penalties and it would have an impact on your funds. Before thinking about pre-closing your personal loan, make sure you perform a cost analysis.
Loan burden gets reduced
Some people are simultaneously repaying several loans. In these circumstances, it is usually preferable to pay off the loan with the higher personal loan interest rates first because doing so lessens the burden of loan EMIs. If you have enough money to pay off your personal loan and you and your lender have addressed the prepayment penalties for a personal loan, then go ahead and do it. In the long term, it can be a wise choice for your financial stability.
Ways to pre-closure personal loan
Knowing that you don’t have to pay the entire amount at once makes preclosing a personal loan easy. Here are a few pre-closing options for your consideration.
Shorten tenure with a slightly higher EMI
To lessen their loan burden and pay it off faster, some consumers choose to make additional EMI payments throughout the loan term. By doing this, you avoid having to pay the extra interest with each EMI that you would otherwise have to.
Same tenure with lower EMI
Depending on the current market rate, switching from a fixed to a floating interest rate may lower your EMI rate. Long-term savings from doing this are possible for you.
If not done properly, pre-closure of a personal loan may result in a number of problems. Before deciding to make additional loan installments, take caution to evaluate your financial status. It is recommended that your EMI not exceed 40–45% of your net salary. You can either contact your relationship manager or go to the lender’s official website to begin the pre-closure of your personal loan.