If you are considering getting a personal loan, Prepayment of your loan can save you a considerable amount of money. But, there are certain things you should know before opting for this option. Read on to understand the cost-benefit analysis, Prepayment penalty, EMI reduction, and boosted credit score. If you have decided to avail of a Personal Loan from a loan agency, Prepayments, make sure to read this article thoroughly to decide if it's worth it for you.
Prepayment penalties
If you plan to pay off your personal loan early, you must carefully read the fine print of the loan agreement you should talk to your loan agent for more detail of your loan agreement. These penalties may vary in cost and may be buried in the fine print of the loan documents. While it might be advantageous for you to avoid such charges, it is still important to ask questions about them. Fortunately, prepayment penalties are not always as costly as they seem. Below is a breakdown of common prepayment penalties.
Some lenders will charge you a percentage of the balance owed, which is based on the outstanding amount. For example, if you owe $100,000 and you pay off your loan in three years, the penalty would be $3,000. This percentage will likely be lower for smaller debts, so you may want to shop around before signing any paperwork. Depending on the lender, the prepayment penalty may be capped at a certain dollar amount or percentage.
Cost-benefit analysis
Borrowers often assume that prepayment of personal loans only saves them money at an early stage of the loan tenure. However, the benefits of prepayment can be realized even later in the loan term. Using an online personal loan prepayment calculator, borrowers can estimate the total amount of interest they will save on the loan. Borrowers should also consider prepayment fees and other expenses, and should only consider prepayment if the net savings will be large enough to justify the fees.
Depending on the tenure of the loan, a prepayment can save significant amounts of interest. When paying off a personal loan early, the borrower will avoid the higher interest charges in the ensuing years. A part payment can also free up a portion of income for future credit. Prepayment charges for a personal loan range from two to five percent of the total outstanding amount. But, the benefits of prepayment may be offset by the cost of interest payments that begin to increase with time.
EMI reduction
A significant amount of money can be saved by prepaying the entire amount of a personal loan. In fact, if you pay off the loan in full at the end of the first year, you will be able to save nearly 52% of the total interest cost. To understand this in more detail, let's look at a simple example. Assuming you are taking out a loan for Rs. 10 lakh at 13% p.a., the total interest cost will be Rs. 3.65 lakhs, and if you pay back the loan in a year, you will be able to save nearly 2 lakhs from the interest expense.
Prepaying the loan can lead to huge savings, but you need to make sure you have the funds to make the payments. This can only be achieved by reducing the EMI amount. Depending on the lender and the loan amount, you can choose to reduce the EMI amount by as much as 40%. However, if you want to save more money, then you should choose the tenure reduction option. This way, you will save more money on interest costs and EMIs overall.
Credit score boost
Prepaying your personal loan in full each month can help your credit score. This is because personal loans are locked in a savings account, which helps you establish a positive credit history. Credit score calculations factor in length of credit history, which is 15% of your total score. Maintaining older accounts may boost your score, but closing them can actually hurt your score. In this case, prepaying your personal loan is an excellent strategy.
Making monthly payments on time can significantly boost your credit score. Traditional lenders may take days or weeks to approve applications and disburse funds. Online lenders move much more quickly. Wells Fargo approved some applicants within minutes. LendingClub reported that most of its customers received their funds in four days or less last year. You can also improve your score by lowering your utilization ratio. You can do this by paying off your balances each month and reducing your utilization rate.
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