Personal loans are a very practical way to satisfy an immediate financial need, however, they have a fixed schedule for repayment that can be spread over months or even years. People who have an increase in their income or obtain a financial windfall usually see the option of paying off the loan earlier as being a smart decision. If you manage prepayment properly, it can become your method of saving and reducing the debt burden—just make sure you understand it and find out when it can actually be of use to you.
It does not actually matter if you are handling your loan with a bank or through a personal loan app, by being aware of the prepayment terms, you can decide more wisely and make your repayment strategy more efficient.
Definition of Loan Prepayment
Prepaying means you give back your loan money either partially or completely, before the agreed tenure is over. Primarily prepayment is of two kinds.
Partial Prepayment In this case you give a single payment apart from tua EMI e.g towards the principal amount of the loan before the due date without changing your normal EMI paym.
Full Prepayment or Foreclosure In cases when you repay the total outstanding loan amount before the end of tenure. So now your debt is all cleared and there is no need to pay EMIs in the future.
Reasons to Prepay a Personal Loan
You can save a lot of money if you choose to repay your personal loan earlier. The most common one is no doubt interest saving. Since banks provide loans at a moderate or high-interest rate, early repayment even for one or two years, can greatly reduce the overall cost.
It certainly brings positive changes to your credit profile by lowering liabilities. If you decide to apply for a home or a car loan in the near future, paying back existing debts improves your loan eligibility and credit score.
Most borrowers who manage loans through a personal loan app find the convenience of checking outstanding balances and making instant prepayments greatly facilitates the process and saves time.
When Would It Be A Good Idea To Make Prepayment?
Prepayment is typically more advantageous in the initial period of the loan tenure. The reason is that at the beginning of the loan tenure, a bigger part of your EMI goes toward interest rather than principal. Thus, paying off the principal early will reduce the amount of interest paid.
It will definitely be a reasonable decision when:
- You have surplus money that does not affect your emergency savings
- You are not giving up other investments with high returns
- You get a reduction or total waiver of the prepayment fee
- You plan to finish paying off the debt before entering into new obligations
Points To Keep In Mind Before Prepaying Your Loan
Prepayment Fees Some lenders may ask for a prepayment fee if the loan is repaid in full earlier than the agreed duration, e.g., within the first 12 months. This fee can be calculated as a fixed percentage of the outstanding amount. Look at your loan agreement or talk to the lender about the prepayment fees that apply to your case.
Use a prepayment calculator to compare the amount of interest you will save with the cost of prepayment. If it’s near the end of the loan period, the savings will probably be small and may make it not worth your while.
Loan Terms on a Personal Loan App If you’re using a personal loan app to handle your loan, it may provide you with a straightforward dashboard that allows you to make prepayments with ease. However, do not forget to go through the small print carefully—some platforms might take you to the lender’s policies, where they still have the same rules for payments.
Impact on Credit Score Making an early loan repayment is definitely a plus in your credit history as it illustrates repayment of the loan in a responsible way. Yet, it can also mean that the average age of your active credit accounts is a bit lowered, which might result in a small score decrease at the beginning. Gradually, the advantage prevails over this minor issue.
Should You Use Surplus Funds for Prepayment?
On the whole, your decision should be in line with your financial goals. In case the return on your current investments is lower compared to the interest charged on the loan, then you may consider using the surplus for the prepayment as the better option. But if your investments show good performance and you feel comfortable with the EMIs, then it may be better to stick to the plan and pay as scheduled.
It would be better to make several prepayments rather than pay off your whole loan in one go. This allows you to maintain the necessary cash flow and at the same time, continuously decrease your debt.
Conclusion
Prepaying a personal loan can be a money-wise move—provided it conforms with the timing and the conditions. Thus, be it through the bank or a personal loan app, it is vital to grasp the procedure, savings, and any penalties that may arise in order to maximize your repayment. It is always advisable to consider the immediate costs and longer term benefits, and pick what suits your current financial position and your plans for the future.