Pre-Close a Personal Loan – Are You Financially Ready?
Personal loans are a great source of financing in times of emergency. In recent years, personal loans have gained massive popularity owing to various benefits such as simple eligibility, zero collaterals, multipurpose usage, attractive interest rate, etc. However, while applying for a personal loan, borrowers often overlook the hidden charges such as prepayment penalties, service charges, etc. levied by the lending institution. There are a lot of financial benefits of preclosing the personal loan. You can save a large amount of money on the overall interest payout by opting to prepay personal loan. This can reduce the total cost of borrowing in the long run. Moreover, by opting to preclose personal loan, you can increase your creditworthiness significantly.
It is to be noted that most of the financial institutions often levy a penalty for personal loan preclosure. This is done to compensate for the interest amount lost. With prominent lending institutions, it is possible to avail personal loans with minimum prepayment penalties. Therefore, it is advisable to check the personal loan prepayment charges levied by the lenders before availing a personal loan.
In case you decide to preclose your personal loan, you should evaluate all the below-mentioned aspects carefully:
Check your finances carefully
Make sure you have enough funds in hand before opting to prepay your personal loan. If you prepay your personal loan without having sufficient funds, you may end up sacrificing your lifestyle and basic needs. Therefore, it is advisable to accumulate surplus to prepay the personal loan, rather than making a hasty decision.
Calcuate the savings
- If you are in the later stages of your repayment tenure, and the closing month of your personal loan is imminent, it is recommended continue with monthly EMI repayment schedule. Opting for prepayment of personal loan and paying the prepayment charges won’t be a wise choice if you are not saving enough interest payout.
- Before opting for personal loan prepayment, you should calculate the difference between the prepayment charge and future interest saved. You should only go ahead with prepayment of a personal loan, if the amount saved is high.
Check the tax benefits
In most cases, personal loans don’t qualify for tax rebates. However, if you have utilized the loan amount for purchasing a house, you can avail the tax exemption. When you are availing tax benefits, it is not advisable to prepay the loan and surrender the tax benefits.
Keep the documents ready
Make sure you keep all the documents required for prepayment of a personal loan beforehand. This can make the entire process of prepayment of a personal loan hassle-free. Some of the basic documents required are mentioned below:
- ID proof such as Passport, Driving License, or Aadhar Card.
- Loan documents.
- Bank statement reflecting the payment and clearance of the last EMI.
- Pre-payment statement, which you can avail by requesting with the lender.
It is important to understand all these aspects carefully before pre-Closing a Personal Loan. Now that you are well aware of all the aspects of preclosing a personal loan, ensure that you make the most of it to reduce the overall cost of borrowing. It is always recommended to discuss the terms of pre-payment with the lender before opting for it.