Personal loans are aimed to help people during their ups and downs of their life. It helps people of the society to depend on these financial institutions for emergencies or during financial crunches. But to repay the loan is essential and there are various methods to it. Mostly one goes for the option of EMIs, but there is also an option of prepayment, which is further discussed today.
There are various options when it comes to repaying the loan, one of which is a prepayment of the loan. This method is convenient for those who do not want to keep on paying the interest for the entire tenure period so they pay the loan amount as a ransom.
Loan prepayment occurs when the borrower has enough balance to repay the loan all at once, even before the tenure ends. In such cases, the borrower has already earned his/her profit and thereby pays off the loan.
Further, we will see if prepaying a personal loan is a good idea or a bad one:
Have a look at the offered interest rate- It might happen so that the availed personal loan charges way too much interest. At this condition to repay the loan is considered to be a better option as one does not have to keep on paying for interest rates. Moreover, it depends on the amount of the loan and the interest charged on it. For example, if a person is availing a personal loan of 20 lacs, at a rate of interest of say 15%, and at the same time another person is availing a personal loan for 2 lacs at the same interest rate, then the rate of interest rate that is to be paid by the first person is comparatively more than that of the second one. TATA Capital personal loan offers interest rates at one’s convenience and provides additional benefits.
Setting for a retirement fund- It might often happen that an individual takes up a personal loan before retirement and the tenure of EMI continues producing a large sum of money. In such cases, it is important to weigh if the money that is owed will reduce the amount for future expenses or not. In the case of retiring officials, it is essential to save up money for other necessary purposes, to avail finances even after retirement. Setting up for retirement and paying off debts at the same time might take a lot of sacrifices and anxiety. Thus to release this stress one can prepay the loan amount as it saves interest money, and further, continue with their retirement savings.
We will also take a look at a few things that are essential before availing or applying for a personal loan:
While repayment, an individual has to not only pay the principal amount, but also the added interest of the particular bank or NBFCs. The rate of interest charged on the principal is the profit earned by the banks. These interest charges vary from one financial institution to another and range between 10% to 26 % at maximum. Though the prepayment solves the problem of paying heavy interest, to avail a prepayment one has to also pay for a prepayment fee that is charged for the loss on the bank’s part to gain profit.
Another criterion that should be kept in mind is the lock-in-period, where the borrower cannot pay off the loan amount, even if they have the amount in store. Further one should scrutinize the terms of the loan agreement and further, calculate the foreclosure amount and compare it with the amount of money that can be saved by prepaying. If the savings amounts more than the foreclosure fees then it is safe enough to invest the money to pay off the complete loan and thereby save earnings.
Before applying for a personal loan one should check interest rates and check the tenure of repayment as these are the main criteria while repayment. Further prepaying a loan can save a lot of interest money.
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