Are You Financially Ready to Pre-Close a Personal Loan?
Pre-closing a Personal Loan can be one of the crucial decisions for you. It would not only reduce your debt burden but would also improve your credit score and enhance your creditworthiness. However, before you go ahead, you must carefully assess your financial health.
Benefits of Prepayment:
It would save you a lot of money which you would have had to pay in terms of interest by reducing the total amount.
It would increase your credit worthiness which will make it easy for you to take more loans in the future.
You could also apply for credit cards easily with a good credit score.
The higher is your credit score, the lesser of a threat you are to banks to lend loans because you have less chances of defaulting on a payment or even delaying payments.
It is important to know if you are financially ready to close your debt obligations. For, a half baked financial decision can hurt your current lifestyle and may increase your credit card expenses.
Besides, many banks charge a pre-payment/ foreclosure fee on prepayment of the loan. This fee is charged against the loss incurred by the bank on the interest amount due to the early closure of the loan.
Different banks have different terms on prepayment, where some may allow prepayment right after 1 EMI payment; others may want you to pay at least 12 EMIs before the same.
Banks allowing Personal Loan prepayment after 1 EMI:
· ICICI Bank
· State Bank of India
· Axis Bank
· Bajaj Finserv
Banks allowing Personal Loan prepayment after 12 EMIs:
· HDFC Bank
· Yes Bank
· Citi Bank
· Kotak Mahindra
· Standard Chartered
Besides, the bank may also ask you to inform for the same in advance. The guidelines will differ from bank to bank, for varied products. It is thus advised always to read all prepayment terms & conditions before you Apply for a Personal Loan.
How to assess if this is the right time to pre-close a Personal Loan?
1. Do you have enough funds in hand or you are going to sacrifice your lifestyle to pre-close the loan?
It is important to assess if you have enough cash in hand and a stable source of income to maintain the same standard of living after repayment of the loan. If in any case you are required to sacrifice your basic needs just to pay the loan in a rush, you may need to reconsider your decision.
In all cases, it is recommended to plan the repayment before you avail the loan. You must accumulate surplus to prepay loans, rather than making a hasty decision one fine day.
You should always have enough funds for at least two to three months’ expenses so that there are no hassles if your current salary is delayed or some other unknown expense crops up. You need to safeguard yourself from applying for a new loan in the near future again.
2. Is this the right time?
In case you are already approaching the closing month of the loan, it is recommended to not prepay and continue with monthly EMI repayment schedule. For, there is no point in paying the loan prepayment charges when you are not saving enough interest on the prepayment.
3. How much is the overall saving?
Before you contact the bank for prepayment request, make note of the pre-closing fee on the transaction. You must evaluate the difference between the prepayment charge and future interest saved. Go ahead, if you get positive numbers.
4. Are there any tax benefits?
Although Personal Loan doesn’t qualify for tax redemption, however, if you have used the amount for buying/building Home, you can avail the tax exemption. When you are availing tax benefits, you may not want to prepay the loan and surrender the tax benefits.
5. Do I have all documents?
You should keep all the documents handy for prepayment of a personal loan. Sometimes collecting documents last minute can be a big hassle and delay the process. Always contact the bank and inform them about your prepayment decision. Enquire about the bank’s guidelines and know about the needful.
It is important to learn about all these aspects before Pre-Closing a Personal Loan. Only positive responses to all the questions can help you know if you are financially fit to prepay the loan.
Steps to pre-close personal loan:
Visit your bank branch as prepayment request is not accepted online.
Make sure you have all required documents with you, including ID Proof, Bank statements citing last EMI, Cheque or Demand Draft balance amount and prepayment charge.
After you pay the required Cheques or DDs, the bank will issue “acknowledgment letter” for your request. You must keep it safely for future reference.
After a few days, the bank will send the loan closure document to your postal address.
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