Important Things to Know before Pre-Closing a Personal Loan
More often than not, a Personal Loan acts as an excellent financial tool, when you are in urgent need of funds. However, given that this special credit is unsecured and is readily available for one and all with minimal documentation, in most cases it comes at a high cost.
The high rate of interest can increase your debt burden exponentially and consumes your credit borrowing capacity. As any financial advisor or even a cautious friend will tell you, paying off a debt at the earliest possible, will always work in your favour by helping you save on the interest outgo. This holds especially true if the debt is personal loan incurring an interest of anywhere between 11 to 22% and in some cases even 26% per annum (particularly, for the borrowers with bad credit score).
While you may have a considerable tenure of up to 5 years or in some cases even 7 years to repay your Personal Loan in the form of EMIs, choosing to pay off your mortgage a little earlier can go a long way in building a robust credit profile.
However, like everything else, pre-closure has its own pros and cons, and before you hop on this wagon, here is all you need to know about pre-closing a Personal Loan.
Pre-Closing a Personal loan Can Help You Save Money
Paying off your loan earlier than its maturity can help you save on the overall interest outgo that you would have otherwise ended up paying to the lender, over the remaining tenure.
Pre-Closing a Personal loan Gives You Easier Access to Credit
If you are on the lookout for a long term credit such as a Home Loan, the lender will need you to have little or no existing debt. This will help you enjoy a higher borrowing capacity, while also ensuring that you get the new loan at favourable interest rates.
Pre-Closing a Personal loan Gives You Peace of Mind
Paying off your Personal Loan, will not only help you enjoy financial freedom but will also aid you to revel in a psychologically positive mindset! Besides, it will act as a morale booster!
Pre-Closing a Personal Loan Can Leave You Financially Dry
In order to pre-close your loan, you will need to pay off the entire outstanding amount in a one go. Since the amount will be substantially high, you may need to accumulate money from numerous sources, which may soak up your savings. The same money can instead be used for some sound investments. If you think, that the return on your investments will be higher than the savings on your interest, then you should rethink your decision to pre-close the loan.
Then again, the same amount of money can be used for other purposes, such as sponsoring your child’s education or bearing the expenses of an upcoming wedding at home.
Pre-Closing a Personal loan Will Cost You Prepayment Penalty
When you opt for pre-closure of a Personal Loan, your bank will levy a prepayment penalty ranging anywhere from 0.5 to 5% of the outstanding loan amount. Only if the penalty amount is lower than your savings, should you go ahead to pay off the loan. If not, you may be better off repaying your loan through regular EMIs.
Knowing these pros and cons of Pre-closing Personal Loan, carefully make all the calculations and make an informed decision. Also, you must understand that pre-closing a Personal Loan is not a moral decision. Every individual has a different financial obligation and profile, and thus the decision to pre-close must involve why you want to pre-close and what are the benefits.
Procedure for the Pre-closure of Your Personal loan
Now that you are aware of some of the most prominent aspects of pre-closing your Personal Loan, you may be wondering how to pre-close your Personal Loan. Let us take you through the steps you need to take for preclosing HDFC Personal Loan Online and lead a debt-free life. The steps are more or less the same for other banks and financial institutions.
- Visit the bank branch, from which you first acquired the loan.
Carry along all the requisite documents, including your Identity Proof, your Bank Statements showing the payment of your last EMI, as well as a Cheque or Demand Draft, through which you intend to make the pre-payment.
- Once you make the payment, the bank will issue an Acknowledgement Letter.
- The bank will then send across your Loan Agreement, in a few days.
Since most banks discourage its patrons from pre-paying their loans, they make it a point to accept pre-payment requests, only when the customers visit the bank branches. Hence, whether you have an HDFC Personal Loan or some other Personal Loan, you may not be able to pre-close it online.
It is advisable to keep communication with your bank transparent and keep proof of pre-closure so that there is no dispute later on. As you will preclose the loan, your debt to income ratio will improve, and you will become eligible for further credit.
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