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Step-wise Guide to Personal Loan Prepayment

Updated on: 14 Dec 2021 // 27 min read // Personal Loans
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In the modern day setting, financial emergencies have become part and parcel of life. It is not uncommon for unpredicted expenses to come up at the most unexpected moments. In such a situation, if you do not have enough money in your Bank Account, you tend to panic. Thankfully, it is now easy to overcome such situations with the help of a Personal Loan, available from all leading financial institutions of India. In particular, SBI Personal Loan is amongst the most famous financial products at the moment, owing to its noteworthy features.

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About Personal Loans

Personal loans are unsecured loans, offered by most banks & financial institutions in India. Personal Loans are offered for a number of purposes and can be used by the borrower as required. Whether it be medical expenses, making big purchases, going on a vacation, or sponsoring higher education, Personal Loans offer you the much-needed flexibility with your finances.

Personal Loan Repayment

One of the major benefits of availing a Personal Loan is the flexibility of repayment. You need not repay the entire amount in one go. Personal Loans come with a repayment schedule wherein you need to pay a certain amount as your EMI every month. Therefore, you are able to repay your loan without straining your monthly budget too much. Once, you have repaid all the EMIs, the lender issues you a NOC stating that you do not owe any further money.

Depending on the lender and the terms described in the Loan agreement, there are different modes of repayment available to you:

  • Regular payment – Wherein you repay the EMI as per loan schedule

  • Part-payment – Wherein you pay additional money towards the loan, over and above the EMI.

  • Prepayment – Wherein you pay the entire outstanding amount before the completion of repayment tenor.

You must note that the EMI consists of two components, Principal and Interest. In the initial EMIs, the interest component is higher than the principal amount. This trend reverses over time, and towards the end of the repayment tenor, the principal component gets higher than the interest. In order to save on your interest expenses, you can opt to foreclose or pre-pay the loan, as per the terms of the agreement.

Personal Loan Prepayment

When you avail a personal loan, it is usually due to a paucity of funds. In most cases, you receive the funds you were expecting after a certain time. In such a situation, you can opt for Personal Loan prepayment and save on the interest expenses. Though, it is pertinent to mention that personal loan prepayment for SBI Personal Loan or any other personal loan can be executed only as per the conditions of the loan agreement.

Factors to Consider before Personal Loan Prepayment

You can opt for Personal Loan Prepayment only as per the conditions of the loan agreement. There are a few important factors that you need to take into consideration before exercising this option: –

  • Lock-in period: – You can opt for foreclosure of your Personal Loan only after completion of the lock-in period. It could vary between a few months to a year.

  • Foreclosure charges: – While some lenders do not charge a foreclosure fee; it may go up to 6%, depending on the lender’s policy. Take this into account before opting for the prepayment.

  • Remaining tenor: – If the repayment tenor is about to complete in a few months, do not opt for foreclosure. Use it only towards the initial half of the repayment tenor.
  • Availability of funds: – You must have adequate funds in your account to support your expenses after paying off the loan.

Steps involved in Personal Loan Prepayment

The process of foreclosing your Personal Loan is very straight forward and involves the following steps: –

1. Read the Terms and Conditions of the Agreement

The first step in the process of foreclosing your Personal Loan is to read the terms and conditions of foreclosure. Only if you are comfortable with them and are in a situation to honour them, should you go ahead with the process.

2. Arrange for the Funds

Personal Loan prepayment has to be made in one go. So, arrange for the funds that are required for foreclosure. You can check your loan statement to ascertain the amount required.

3. Contact the Lender

Contact your loan manager or customer care executive of the respective financial institution. Inform them about your intentions to foreclose the loan and seek guidance with the process.

4. File the Application for Foreclosure

You need to fill in the appropriate forms along with the application stating your intentions regarding foreclosure of the Personal Loan. Be sure to mention all the relevant details in this application.

5. Make the Payment and Take a Receipt

After you have submitted the application, the executive will inform you about the outstanding amount. This amount will include any foreclosure charges as well as other charges levied by the lender. You need to pay this amount through cash, RTGS, NEFT, DD, Cheque, or online payment. Make sure to collect the receipt for the payment along with the reference number.

6. Apply for a NOC

Usually, you get the NOC (No Dues Certificate) from the lender after a few days of making the payment automatically. If you do not get the same, apply with the lender for the NOC. Once you receive the NOC, keep it safe as you may require it in the future.

Advantages of Personal Loan Prepayment

Following are the major benefits that you enjoy with prepayment of your Personal Loan: –

  • You save significant money on interest cost

  • You enjoy freedom from the burden of debt

  • You can use the money for a more productive purpose

Disadvantages of Personal Loan Prepayment

There are some disadvantages to foreclosing your Personal Loan as well, such as:

  • You need to pay foreclosure charges which can go as high as 6% of the outstanding amount.

  • You can face a liquidity crunch as you have paid a large sum in one go.

Prepayment of your Personal Loan is a significant financial decision with its own set of advantages and disadvantages. Therefore, must make a final decision only after careful consideration.

Also Read: 3 Factors to Consider When Choosing the Ideal Personal Loan Repayment Tenure

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