- July 20, 2020
- Posted by: Ganeshcbani
- Category: Blog
You may have heard that you can sometimes close a personal loan before its term is up, but what does that mean for you? In this article, we’ll take a look at the pros and cons of closing a personal loan before the term is up.
Personal Loan Closure
If the credit card payments are charged for interest, personal loans face some of the highest interest rates. Personal loans are typically between 15 and over 20 per cent, because they are often unsecured in nature. However, a personal loan in the country is common because it helps to resolve a temporary or urgent cash need. Often used for the purchase of consumer goods, marriages, health care or vacations, most banks in the country offer personal loans which differ in charges and fees. However, if a personal loan may be prepayment or partially paid, other benefits are available to the borrower.
Firstly, if advance payment can be made fairly early in the loan period, a borrower appears to save money on interest. For general, a personal loan is locked for for a year in which all remaining sums can be prepaid.
For example, if the personal loan is 15% for Rs 2 lakh and the monthly EMI is Rs 4758 for a five-year duration. By the end of the first year, Rs. 29039 and Rs. 28057 will have been charged by the customer as interest. If the consumer now wants to prepay the full sum, he is entitled to pay Rs.57,422 lower in interest form.
Another example would be if you took a Rs. 3 lakh loan for a 5-year term of 15 percent, you would have to pay an additional interest rate of Rs. 1,28,219. A division would indicate that you finish paying Rs.42,086, or about 33% of your total interest in first year, Rs.35,084 or 27% of your total interest sum in second year, while paying Rs.26,956 for third year or 21%, Rs.17,522 or 14% for fourth year and Rs.6571 or just 5% for the last year.
Savings before payment
The trick is simply to pay the whole amount early in the loan term so that the rewards of losing interest are less rewarding. And in the later stage, though, when the customer may have paid more of the interest it is still best if he pays the loan in full and gets the monkey off your back if he has surplus cash.
Nevertheless, some banks have interest rates ranging from 3-5% when a borrower wants to pay a loan in advance. In recent times, the Reserve Bank of India directed banks not to charge customers when they pre-close a loan account, but this applies only to “floating” loans. As the majority of personal loans are based on a fixed rate, the rule does not apply. Nevertheless, there are other public and private banks that charge no advance payment. There is a great benefit in this situation because a consumer may make use of unused cash by paying a loan. It’s a basic business at play – it is easier to pay out the loan if idle cash in hand pays you less than held in a bank or invested elsewhere compared with your personal loan’s interest.
Part of the personal loan is charged when the amount of idle money is lump sum but is not equal to the entire principal amount of the loan. Part payment works as it lowers the unpaid principal, which in effect reduces the EMIs and the overall interest that you pay. However, it is important to note that it helps only when you make a large amount of lumsum money as a part payment.
It is an simple but convenient way to save the interest rate because the part-payment balance is deducted directly from the principal payer as of the date / month of payment. If a Rs. 3 lakh loan for a period of 5 years is 15%, an additional interest of 1, 28,219 would have to be paid (as seen above). You will save 32 percent of the interest portion in the case of a nominal partial payment of Rs. 50,000/- after the 6th EMI.
Partial payment Standard Personal Loan Refund
There is a clear link between the price you pay partly and the time you save it by reducing your interest. Nevertheless, paying your personal loan in very little sum does not help, in particular if there are advance payments.
There is another aspect payment benefit. A personal loan partial payment is not just required once. This can be more than once and even a lump-sum daily payout. This will also that EMI amounts and the overall interest charged. However if there are pre-payment fees for each loan, the advantage of the decrease in the overall interest owed would be considerably higher when a sufficient amount is repaid annually. The major protection for part payment, however, is that many banks will not require it in the case of personal loans. Banks / NBFCs are subject to a lock-in clause on the date (EMI min. 6 through 12) and a partial payment sum (EMI multiple or Principal Outstanding percent)
Credit rating effect
Prepayment of a continuous personal loan has no immediate effect on your credit rating. However, a complete advance payment effectively closes a loan account in the long run, thus increasing your credit rating. At the other hand, part of the loan payment has nothing to do with your credit score, which in turn will allow you to pay off the loan entirely in the specified term.
An old adage states that one will borrow and repay as soon as possible. It particularly relates to personal loans, which can cheat off at their high interest rates. If you can pay a loan in full or half, it’s best to do it without worrying a lot about it.