Lenders charge borrowers a prepayment penalty if they repay part or all of their loans early. Loan documents describe these fees and may be applied to conventional mortgages, investment property loans, and personal loans. In the first few years of a loan, fees are typically 4% of the outstanding principal balance and then decline to zero.
People who want to pay off their debt or build equity in their homes may encounter prepayment penalties as an obstacle. However, it is often possible to avoid these fees by refraining from taking out certain types of loans, paying off your loan once the fees have ceased, or directly negotiating with the lender before closing on the loan.
What is a Personal Loan prepayment penalty?
A prepayment penalty, sometimes known as a “prepay,” is a price paid to borrowers who pay off a loan within a few years after taking it out. When the loan has been repaid for three to five years, the lender usually stops charging them. Lenders apply these costs to deter borrowers from paying off or refinancing their loans, which would result in a loss of interest income for the lender.
There are numerous advantages to taking out a personal loan: no end-use restrictions, fast loan approval, substantial loan amount, personal loan tax exemption for salaried no collateral requirement, and personal loan tax benefits. However, the absence of security results in a comparatively higher interest rate being charged on this advance. Therefore, borrowers often prepay part or their entire loan before the tenor ends to reduce their interest burden. In some cases, part-prepayment charges may also apply to advance payments.
Types of Prepayments
Personal Loan – Partial Prepayment
It is possible to partially prepay your personal loan if your finances prevent you from paying off your debt completely. An advantage of making a partial payment towards your debt is that you do not have to do it all at once. This means that you can regularly prepay lump-sum amounts for your personal loan. If you plan to make multiple partial pre-payments on your loan, consider the pre-payment charges.
Personal Loan – Full Prepayment
If you have adequate finances, you can simply prepay the loan in a single installment when you have sufficient finances. Even when your finances permit you to do so, you can prepay the entire loan amount. Make sure you understand any associated fees.
Prepayment Penalty – How it Works
Many people cannot repay a personal loan within a year or two of taking it out. Many consumers, however, refinance their loans to take advantage of a cheaper interest rate or to enhance their credit. Unfortunately, prepayment penalties might make refinancing after taking out a loan more expensive within the first few years. Prepayment penalties differ depending on the lender and loan type. Some lenders do not charge them, while others limit them. The prepayment penalty is typically levied only for the first few years of the loan, after which it gradually disappears-normally within three to five years. It is important to read disclosures before accepting a loan offer because prepayment penalties only apply to certain types of loans.
Why do lenders charge prepayment penalties?
Every loan product has a specific duration, and lenders expect a certain amount of interest income from it over time. As a result, lenders obtain a reduced interest rate when a borrower chooses to repay a loan sooner. As a result, they can impose a penalty for paying off a loan early to dissuade borrowers from doing so.
What are the advantages of paying off a Personal Loan early?
Even though individuals may be subject to an early prepayment penalty in some situations, this option offers several advantages. The interest burden, for example, can be lowered in the following ways:
- Choose a lower EMI payment option
- Tone down the tenor
It’s important to note that the prepaid money is only used to pay off the principal. On the other hand, reduced principal qualifies a borrower for more inexpensive EMIs and lower borrowing expenses. Alternatively, if a person wants to save money on interest, he can prepay to shorten the tenor while keeping the EMIs the same.
Before making a prepayment, utilize a personal loan part-prepayment calculator to see which choice is viable. Also, before applying for a loan, read the fine print or loan agreement paper. In most cases, these documents include information concerning additional fees. It’s easy to select when to use this facility if you know the prepayment penalty.
Prepay your Loan at Bajaj Finserv My Account