The personal loan segment is dominating India’s credit landscape and has escalated two-fold in terms of value from Rs.75,088 crore in FY19 to Rs.147,236 crore in FY22. It is a popular financial option that provides prompt financial assistance to borrowers.
However, before applying for this multipurpose credit option, borrowers must have an idea regarding the charges associated with the borrowing, like interest rate, prepayment penalty, etc. These are additional expenses that contribute significantly to the loan expenditure. Therefore, not knowing about these charges can lead to a financial burden on the borrower’s part.
3 Ways To Avoid A Prepayment Penalty
A prepayment penalty is the charge lenders levy on borrowers for foreclosing the loan amount ahead of time. It is charged to recoup interest amount which lenders would otherwise earn throughout the repayment tenor from the borrower. As prepayment charges add to the cost of borrowing, borrowers can follow the mentioned ways to avoid prepayment penalty:
- Negotiate with lender: Borrowers can also negotiate to waive the prepayment penalty with their lenders. Instead, they can ask for alternatives that do not have a prepayment penalty. However, borrowers must note that such negotiation may result in a higher interest rate. Or else, borrowers will be given an opportunity to foreclose the loan in proximity to the final repayment date and dodge the prepayment penalty.
- Refinancing loan amount: Transferring loan principal can also help borrowers save on the loan expenditure. Borrowers can look for lenders who do not impose prepayment penalties or else offer lower interest rates. If the new lender is charging a lower interest rate than the current lender, it will easily cover up the prepayment penalty charge.
However, borrowers must avoid frequent refinancing as it indicates that they will transfer the outstanding the loan amount once interest rates have dropped. Hence, lenders will be less likely to eliminate the prepayment penalty.
- Shift in prepayment penalty term: There are times when lenders shift the prepayment penalty over the repayment tenor of the loan, indicating that as borrowers reach closer to the loan tenor, they will be levied minimal or no prepayment penalties at all. Hence, it will prove beneficial for borrowers to wait for a few years before foreclosing loan until the prepayment burden is curtailed.
Furthermore, borrowers can try applying for a personal loan with a co-signer. Hence, liability of prepayment charges will fall on both the applicants. Borrowers can also pay a higher down payment to get the upper hand in negotiating better loan terms, including withdrawal of the processing fee, lower interest rate, etc.
Besides prepaying loan amounts and reaping tax benefits, borrowers can conveniently check the exclusive pre-approved offers as extended by the lending institutions on a wide range of products like personal loans, business loans, credit cards, etc. These offers expedite loan application process making borrowing hassle-free and time-saving. Willing borrowers can check their pre-approved offers by submitting their names and contact details.
Advantages of prepaying a personal loan
There are several reasons why prepaying the loan proves beneficial:
- Save on interest amount: The interest outflow is curbed excessively when borrowers choose to prepay the loan principal. Prepaying loan amount in the latter half of the tenor leads to considerable savings. Borrowers must consider prepayment penalties and other charges to determine the net savings. Besides prepaying loan principal, borrowers should know other factors affecting personal loan rates.
- Positive effect on credit score: Borrowers opting for prepayment of the loan amount partially or fully are wiping out the repayment burden in one go. Repaying loan amounts on time or before the stipulated time always proves beneficial in enhancing the credit score, and helping borrowers avail another credit option. Apart from improving the credit score by prepaying the loan amount, borrowers must know things to improve personal credit score.
- Reduces debt burden: Personal loan EMIs consume a significant part of borrowers’ earnings; hence opting for prepayment helps one mitigate debt burden and attain monetary independence. In this context, borrowers must know other ways to manage debt that will help dodge monetary burden.
Besides prepaying loan amounts, borrowers can also reap personal loan tax benefits and reduce the cost of borrowing.
However, personal loan tax exemption for salaried and self-employed individuals will be functional only if the loan amount is used for specific purposes like constructing a residential property or expanding a business.
To sum up, a personal loan is an effective credit option that provides financial backup during urgencies. However, to make the borrowing cost-effective and functional, borrowers need to have a well-rounded idea regarding the additional charges like a prepayment penalty, interest rate, processing fees, etc. Hence, having an in-depth idea regarding these hidden charges will help borrowers in making an apprised decision.
