Is pre-closure of a Personal Loan a good option?
October 06, 2020
Planning to make a big-ticket item purchase? Getting a Personal Loan is a quick-fix solution. For people who don't want a burden of accumulated debt can opt for pre-closure of their Personal Loan, but that calls for a penalty from the lender. Read further to know whether pre-closure of a Personal Loan is a good option or not.
Whether you want to buy an expensive item or need urgent cash for medical purposes or you want to fund a wedding or higher study, it is easy to get a Personal Loan. This is a popular type of credit option offered by almost all banks, co-operative banks as well as Non-Banking Financial Company (NBFCs). Moreover, this is the only unsecured loan for which you do not have to pledge any security or provide any guarantor.
Just like others, you may also prefer a Personal Loan, as it is a multi-purpose loan. The bank will never ask for the reason behind availing of the loan. With the right paperwork and a clean credit history, the loan gets disbursed within minutes. Let's look at some of the features of the Personal Loan:
- A Personal Loan is an unsecured credit facility available for salaried and self-employed individuals
- The interest rate for the loan starts from 11.25% per annum, if you apply at ICICI Bank.
- The loan tenure can range from 12 months to 5 years. There is flexibility in terms of choosing a tenure.
Compared to all the loans, a Personal Loan is the only one that usually has a higher interest rate, which in turn can increase your Equated Monthly Instalment (EMI) burden. Therefore, some prefer to pre-close the Personal Loan before the tenure ends. This is known as pre-closure or foreclosure of the loan. Under this process, you save on the EMIs and the interest that you pay with the principal amount in the long run. Before you decide to pre-close it, you need to seek permission from the lender, while in some cases, lenders also charge foreclosure penalty charges, if you pay the loan before the agreed tenure. The bank levies a penalty to compensate for the loss of interest amount.
Is pre-closure of a Personal Loan a good idea?
There are some scenarios when pre-closure of a Personal Loan would be a wise decision:
- Reduces your debt burden: If you have adequate finances to pay the loan amount before the loan tenure ends, you can do so. However, you need to have a word with your bank on whether they charge any penalty for pre-closure. The pre-closure facility reduces your debt burden; hence it would be a good option for your financial health.
- No impact on your credit score: Foreclosure or pre-closure of the Personal Loan does not affect your credit score. Lenders will still trust you in terms of timely loan repayment if you apply for a loan in the future.
- Avoid pre-closure of the loan in latter stages: When your Personal Loan is in the latter stage of repayment, then it wouldn't be a wise choice to pre-close it. You will be unable to accumulate enough savings and you will also have to face penalty charges. Do a cost-benefit analysis before opting for pre-closure of your Personal Loan in the latter stages.
- Think about the charges: When you initiate the pre-closure of a loan, the bank levies a penalty of 5% per annum of the outstanding amount and other applicable charges.
Pre-closure of loans may or may not be the right step. You need to analyse your financial situation before paying off the entire loan amount at once. You can initiate the pre-closure of a Personal Loan online by visiting the official website of the bank.
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