The personal loan preclosure charges are among the charges you will likely pay when repaying your loan. However, it is a conditional charge, levied only if you decide to prepay your loan.
That said, most borrowers availing these unsecured forms of credit may be unaware of the charges they have to incur during the prepayment of loans. That’s precisely why checking the additional charges levied by a lender before finalising a specific loan offer is important.
Read on to learn more about prepayment penalty charges and how to avoid them.
A lender levies a prepayment penalty, amounting to a certain percentage of the outstanding balance when a borrower pays off the loan entirely or partially before the term. The lender must disclose the prepayment charges on personal loans before sanctioning a new loan.
This helps ensure that the borrower is well informed of the consequences that may entail while prepaying the loan before the end of the term.
Personal loan preclosure charges are levied to help compensate for the cost of lost income by the lender. Given a choice, a lender would rather lend to a borrower who pays precisely on time – not prior or later – to generate maximum income from the interest. This is why prepayment penalties have traditionally been put in place.
These penalties don’t just come into play when the borrower pays off the entire loan. Still, some of these also apply if you pay a considerable part of the loan as a single payment. Also, lenders can recover profits using prepayment penalties when offering loans at below-average interest charges.
On prepayment of a personal loan, lenders may calculate the penalty based on the remaining principal or how much interest remains once you’ve paid off the loan. The fee can also be a fixed amount decided before signing the loan agreement.
Also Read: Personal Loan Foreclosure Charges
As mentioned earlier, lenders calculate prepayment penalties in various ways. This mainly depends on the kind of loan you have taken – a small personal loan, a substantial loan – or how the lender calculates it.
You must know how to calculate the penalties beforehand to determine if prepaying the loan is beneficial. The various ways to calculate it are as follows:
The best way to avoid a prepayment penalty is to find a lender who doesn’t charge a prepayment fee on loans. Make sure to ask relevant questions like if it is for a certain number of years or the entire term of the loan.
Besides this, there are other ways to prevent a prepayment penalty.
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While some lenders levy personal loan preclosure charges, others don’t have any prepayment penalty clause in their loan contracts. Lenders must inform about prepayment penalty charges even before the loan agreement is finalised.
To avoid prepayment charges on personal loans, you can talk to the lender to skip the penalty close to the final due date. Revisit your loan agreement to check if you can make a partial payment without incurring any penalty. Moreover, you can avail of an instant personal loan on online platforms like Fibe that do not charge a penalty on its prepayment.
It may be beneficial to prepay a loan if the lender does not charge any penalty, as you can save on the interest payable.
No, loan prepayment does not affect the CIBIL score in any way.
Prepaying a loan reduces the total outstanding amount. In turn, the EMIs due on loan repayment, as well as the interest component, are reduced.