Pros and Cons of Early Closure of Personal Loans

Personal loans are a popular choice in India for meeting urgent expenses of all types. However,  the large interest rates and monthly installment burdens can become stressful. As a result, people often pay off their personal loans as soon as they have the funds to do so. But is the early closure of personal loans financially beneficial?

This blog will answer this question by considering the pros and cons of pre-closing your personal loan based on your status so you can make an informed decision. If you choose to go ahead, we will also tell you how to close personal loan early in this quick guide. So, let’s start!

What is Early Closure or Pre-Closure of Personal Loans?

Pre-closure is when you partly or fully repay a loan before the due date. Pre-paying a loan lowers your liabilities and offers peace of mind, but it is not always financially advisable. Yes, you don’t have to pay interest and can get rid of debt. But you may have to pay a penalty amount to the lender as the lender loses the expected income from interest.

So, we will discuss the pros and cons of personal loan pre-closure before going into the process of pre-closing personal loans.

Benefits of Early Closure of Personal Loans

Here are the benefits you can enjoy by early closure of personal loans, which you must consider if you have the financial means to pre-close personal loans.

Quick Relief from Debt

Pre-payment relieves you of your entire debt in one go! After pre-closure, you no longer have to pay EMIs with an added interest.

Net Savings Possible

Pre-paying your personal loan will reduce your overall interest payout on that loan. Bearing relatively low pre-payment charges in this process is often more economical than paying the complete interest. 

However, there are exceptions if the pre-payment penalty is higher than the remaining interest. This is unlikely if you pay the loan off early just after the lock-in period, but you must check your math first!

Better credit score

Your credit score is at risk if there are delayed payments or if you already have a lot of debt. And this makes it tough to get new loans. But pre-closing personal loans allow you to settle your loans quickly to lower your liabilities, eliminate delays, and increase your credit score. This increases your chances of getting approved for another loan in the future.

Disadvantages of Early Closure of Personal Loans

Early closure of personal loans also has a flip side. Here are the disadvantages you may face by paying off your personal loan before it is due.

Lock-in period

Most loan providers apply a one-year lock-in period from the day the loan is disbursed. So, you will have to wait for this period to get over before you can pre-pay the loan, even if you have the required funds in advance. This lowers or removes the savings you can make on pre-payment, as you have already paid large amounts in interest by the time the lock-in period ends. 

Pre-payment charges

You may have to pay extra charges to the lending institution for the early closure of your personal loan. It can be a flat fee, or it may be calculated based on the interest still due. This can lower your expected pre-payment savings if the amount is similar to the net interest on upcoming EMIs. 

You may even lose money instead of saving it, especially if you are paying late or after a long lock-in period. So, you must consider the interest rate and penalty amount to calculate how much you save or lose before making a decision. Notably, there are no pre-payment charges in the case of floating interest rates. But personal loans with floating interest rates are rarely available.

Loss of lump sums

You may have to cut back on other expenses to save money for the early closure of personal loans. Moreover, you will pay a large amount in one go instead of investing it to earn more or cover future needs.

How to Close Personal Loan Early?

The procedure for early closure of personal loans is quick and easy. If you have made up your mind to pre-close the loan, follow these four steps:

• Visit the bank or institution where your personal loan is active.
• Carry and present the necessary documents, such as ID Proof and bank statements, to the respective officials at the bank and make the request for pre-payment.
• Also, carry the cheque or demand draft with which you will then pay the remaining loan amount (fully or partially), processing fees, and pre-payment penalty as instructed.
• Once the entire amount is paid, the bank will give an acknowledgement letter and then a loan agreement that you must keep safely for future reference.

The entire process is quite simple and should not take more than a few days.

The Final Verdict

When it comes to personal loan pre-payment, the right choice depends mainly on your financial standing, lock-in period, loan amount, remaining interest, and interest rate. In general, you should go for early closure of personal loans just after the lock-in period after ensuring that the amount you save by not paying the remaining interest is greater than the pre-payment fees. This will reduce your liabilities and improve your credit score while saving you a significant amount! 

On the other hand, if the penalty is greater than or equal to the interest you will be paying, you may continue to pay the loan EMIs to avoid paying a large sum at once unnecessarily. Early closure of personal loans is also not viable if you do not have sufficient funds to bear the large loan amount and penalty. Partial pre-payment with a smaller penalty and lower future interest (due to principal reduction) is also a good option in such a case.

Besides, you should understand the terms and conditions of your loan provider before taking the loan to determine if early closure or partial pre-payment will be beneficial. If all this leaves you confused, contact a reputed financial agency like Piramal Finance that provides reliable advice and favourable loans to solve all your personal loan repayment issues.