personal loan part prepayment and closure

Understanding Personal Loan Part Prepayment & Closure

On-time debt repayment is a wise financial decision that builds a solid credit history. However, loan preclosure calls for cautious thought. Prepayment fees are incurred but, they shouldn't outweigh the benefits of early payback. Although paying off a loan early doesn't harm your credit, if you're hoping for a rapid credit rise, it may hinder your attempts. 

In this blog, we’ll explore the preclosure of Personal Loans, its significance, and how to make informed decisions when doing so.

What is Part Prepayment of Personal Loans?

A partial prepayment is when you make a payment toward your loan greater than your monthly instalment. By gradually lowering the outstanding principal balance, this additional payment lowers the total interest expense and the amount of interest paid in instalments. Borrowers might potentially reduce interest costs for the loan term and speed up the repayment process by starting a partial prepayment. However, communication with your lender is vital for the partial prepayment procedure to smoothly pass. 

Defining Personal Loan Closure

In a pre-close loan, the remaining amount is paid back in full before the planned tenure of the loan term expires. It means instead of paying EMIs in instalments, the whole amount will be paid together to close the loan. While using a Personal Loan EMI calculator can assist in choosing a loan term with initially manageable EMIs, there are situations where borrowers may decide to go with preclosure. This way borrowers can lower overall interest expenses and save a significant amount on EMIs. 

Must Read: 5 Things You Should Know About Personal Loan

Personal Loan preclosure advantages

Closing your Personal Loan ahead of schedule can offer several benefits as follows:

Lower Interest Expenses

Prioritising a preclosure of a Personal Loan can save substantial money on interest with the overall Personal Loan Fees & charges. Early repayment of the outstanding debt can save a lot of money, as it reduces the interest associated with the loan.

Positive impact on credit history

A Personal Loan preclosure gives you a better credit history, as you complete your loan before your tenure expires, making it convenient. It proves to lenders that you can handle your finances and are a responsible borrower with management skills. It could improve the terms and circumstances given to you and give you a better chance of getting a future loan.

Debt-free status

By releasing you from the weight of debt, filing for a preclosure allows you to have a stress-free life without regard to money. If you are debt-free, you can lead your finances more effectively and better manage your money in investment and more return-worthy financial goals.

Timing & considerations for preclosing personal loans

It's important to carefully analyse several criteria when deciding to pre-close a Personal Loan to ensure it fits your circumstances and financial goals. 

When to Preclose a Personal Loan:

  • Early in the Loan Tenure: Early loan term preclosure on a Personal Loan might result in significant interest savings. Paying off the outstanding balance on time is a golden chance for borrowers to reduce their overall interest rate with better management. Conducting a cost-benefit analysis will also play a significant role, ensuring that if you are doing preclosure of your loan, it will lead to financial betterment.
  • Strong Credit History and Score: For customers with excellent credit histories and scores, preclosure of loans is a favourable thing, as it shows the ability of the borrower to manage their credit responsibly by making on-time loan payments.  Furthermore, preclosure may increase eligibility for later loan applications because lenders look at it favourably.

When to avoid loan preclosure:

  • Building Credit Score: Preclosing a Personal Loan too soon is not a good option for those seeking a rise in their credit score. Maintaining timely loan payments over time will help to maintain a good credit score and history, which is needed for better creditworthiness. Preclosing the loan too soon could reverse this development and limit the rise of your credit score.
  • Excessive Preclosure Charges: If the preclosure costs are excessive, especially in the later parts of the tenure, it might not result in substantial savings. The total cost of the loan may also be increased by preclosure fees and Personal Loan costs. Thus, to know if preclosure is a good financial move, having a comprehensive cost-benefit analysis is crucial.

When determining if you should pre-close a Personal Loan, it is important to decide after detailed research and planning. It's crucial to weigh the potential savings against associated costs and the implications for your credit history and future loan eligibility.

Kotak811 personal loan preclosure charges

Kotak811, like many other financial institutions, implements foreclosure charges that vary depending on the duration of the loan:

  • Loans disbursed on or before February 1, 2020:
           - Partial prepayment is not permitted.
  • Loans disbursed after February 1, 2020:
           -Partial prepayment allowed after completion of 12 months.
           -Up to 20% of the principal loan outstanding can be prepaid.
           -Allowed once per year.
           -Charge per instance of part payment: Rs.500 plus taxes.

Must Read: Understanding Personal Loan Foreclosure

Conclusion 

Making wise financial decisions requires understanding the subtleties surrounding the preclosure of Personal Loans and partial payback. Although there are advantages to preclosing, such as lower Personal Loan Interest Rates, better credit, and being debt-free, it's important to take timing and associated costs into account. 

Based on their unique situation and financial objectives, borrowers can choose the best course of action by carefully assessing the benefits and drawbacks.

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This Article is for information purposes only. The views expressed in this Article do not necessarily constitute the views of Kotak Mahindra Bank Ltd. (“Bank”) or its employees. Bank makes no warranty of any kind with respect to the completeness or accuracy of the material and articles contained in this Newsletter. The information contained in this Article is sourced from empanelled external experts for the benefit of the customers and it does not constitute legal advice from Kotak. Kotak, its directors, employees, and contributors shall not be responsible or liable for any damage or loss resulting from or arising due to reliance on or use of any information contained herein.

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