Pre-payments in personal loans can come with additional fees. As banks give personal loans without the security they make profits by extra interest rates borrowed by the borrower. Hence whenever you pay back a personal loan early, the bank demands extra fees. Personal loan EMIs are very rigid if you miss a payment or want to pay early both come with extra fees. In both scenarios, this goes onto your credit score in a negative way. Timely payments boost your credit score but discrepancies can bring the score down.
Although if a customer pays the loan in full amount relatively early in a tenure then the customer saves a lot on interest rates of upcoming months. Personal loans have higher interest rates as high as 20% hence the savings made are not less. It is always a good idea to save up on interest and get the debt paid with little extra fees as interest rates for all upcoming months are more than that. If you want to repay the loan late in the tenure then count the extra fees and interest rate of the remaining months and take the decision where you need to pay less.
Some banks however don’t charge prepayment charges. When this is the case it is always a good idea to prepay the loan. The Reserve Bank of India has recently told banks to stop charging prepayment fees in this pandemic economic crisis. Part-payment is something where you have only half or less than half of the cash of your loan which you pay back early. This can help if the amount you pay early is considerable as compared to your loan. Very less amount than your loan money will do more damage than good.
If your interest rate is too high like 15 to 20% then the money saved in interest rate is always more than prepayment charges. Pre-payment charges range from 3-5% of your loan. It is a simple economic strategy to invest the money you have if it is not making more money by investing then pay high-interest rate loans. If you are making more money by investing then better invest it rather than prepaying the loan. Part-payment of a loan does not go on your credit history and hence does not reflect on your credit score. Full prepayment when done too early does have an effect on your credit score. This means that the bank is losing a lot of interest because of you and they will try to charge some extra fee on such things.
There's an old saying: borrow as little as possible and pay back as early as possible which is actually right for because of their high personal loan interest rates. Personal loans are of two types secured and unsecured. Secured loans come with collateral attached which the bank can sell if you are unable to pay the loan. Unsecured loans are without any collateral or security so they generally require a higher credit score to approve the loan. They also come with higher interest rates and short payback periods depending on your credit score.
You should always take loans as a calculated financial risk which you are sure you will be able to pay in the payback period. Although some expenses come as an emergency that you can’t afford upfront. At such times a personal loan can be a perfect option for you to meet your financial needs. Remember, calculating interest rates of your money in a bank account and loans is a must when it comes to early repayments or you can use an personal loan calculator on the lender's website.
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