Pros and Cons of opting for Personal Loan Prepayment
Personal Loans can be a major lifesaver in a financial crisis. You may have arranged enough money for a later date to pre-pay the entire loan amount or even a part of it. But should you go ahead and prepay it? Here’s our answer.
What is Personal Loan Prepayment?
Prepayment of a Personal Loan means repaying the entire outstanding amount or paying a part of it before the due date as per the agreement. When you prepay a loan, the bank levies charges as per the outstanding loan amount. Banks call it the foreclosure charge on a Personal Loan. ICICI Bank levies zero charges on prepayment/pre-closure of the loan after 12 EMIs. However, foreclosure charges of 5% of the outstanding principal (plus GST) is levied if the loan is closed within 12 EMIs.
Pros of Personal Loan Prepayment
Benefits of prepaying a Personal Loan:
Improving your Credit Score
The foremost benefit is a major boost to your Credit Score and an improved credit history. If you plan to apply for loans in the future, expect a lower interest rate.
Saving on interest costs
If you wait till the end of the payment period, the interest levied on your borrowed amount will be higher. However, on foreclosure, you will save a significant amount on the interest. Use a Loan Prepayment Calculator to know how much you can save.
Even Part Prepayment helps
When you’re short on funds, paying a part of the loan can also be beneficial. The outstanding loan amount is reduced leading to a reduction in the EMIs and the total interest. The sooner you make the part payment, the more you save down the line.
Cons of Personal Loan Prepayment
Disadvantages of Personal Loan Prepayment:
A lump-sum amount needs to be paid
Paying the entire loan amount or even a part of it can limit your financial stability. It’s a lump-sum amount and prepaying a loan or even a Personal Loan Balance Transfer are not to be taken lightly.
Impact on asset liquidity
If you are planning to use your liquid assets for your Loan Prepayment, be mindful. A financial emergency, a shortage in liquid assets etc. may befall you in the future.
The foreclosure charges
The lender will ask for all the Personal Loan documents and a foreclosure charge if you want to close the loan before the tenure ends.
Talk to an ICICI Bank representative, assess your financial situation and make the right choice.
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