Navigating the financial waters of Personal Loans can be daunting, especially when considering an early settlement. With various factors at play, including pre-closure charges for Personal Loans and RBI guidelines, understanding the nuances becomes crucial.
Understanding Personal Loan pre-closure
Personal loan pre-closure is the act of repaying your Personal Loan in full before its maturity date. This option is chosen by borrowers who find themselves in possession of surplus funds and wish to clear their debt earlier than planned. Pre-closure liberates borrowers from the commitment of monthly EMIs and potentially reduces the total interest paid on the loan.
However, it's crucial to be aware that lenders often levy a fee for pre-closure to offset the loss of expected interest income over the loan's original term. These charges are typically a percentage of the outstanding loan amount or a fixed fee, as dictated by the lender's policy and sometimes guided by RBI regulations.
Benefits of Personal Loan pre-closure
Interest savings: The most compelling benefit is the significant savings on interest payments. Since interest accrues over time, paying off the loan early cuts down the interest cost drastically.
Credit score improvement: Closing a loan account in good standing can positively impact your credit score. It shows lenders that you are a responsible borrower, which can be beneficial for future credit applications.
Debt relief: Pre-closing a loan lifts the psychological and financial burden of debt. It frees up cash flow and reduces your debt-to-income ratio.
Increased financial security: Without the obligation of future EMIs, you have more financial flexibility. This can provide a sense of security, allowing you to redirect funds towards savings or investments.
Unlocking new credit opportunities: With one less liability on your credit report, you become more attractive to lenders for any future borrowing.
Disadvantages of Personal Loan pre-closure
Pre-closure charges: As mentioned, lenders may impose pre-closure charges, which can be a significant percentage of the remaining loan amount. These fees can sometimes nullify the benefits gained from interest savings.
Opportunity cost: The surplus funds used for pre-closure could potentially be invested elsewhere for a higher return. If these returns surpass the interest saved by pre-closing the loan, it might be financially wiser to invest the funds instead.
Liquidity impact: Using a large sum of money to pre-close a loan could affect your liquidity, leaving you with less cash on hand for emergencies or other investment opportunities.
Opting to make prepayments on a Personal Loan
The decision to make prepayments on a Personal Loan hinges on several financial considerations. Prepayment essentially means paying more than your scheduled monthly installment, thereby reducing the principal amount and the interest burden:
Interest rate comparison: If the interest rate on your loan is higher than what you could earn from savings or investments, prepaying could save you money in the long run.
Financial stability: Prepayments can lead to financial relief and stability. If you're in a stable financial position and expect no significant expenses, using excess funds to prepay your loan could be a wise decision.
Loan Tenure: The benefits of prepayment are more pronounced if you are early in the loan tenure, where the interest component of the EMI is higher.
Pre-closure charges
When considering the pre-closure of a Personal Loan, it's important to be aware of the various charges that could apply.
Pre-payment charges: Typically, a lender may charge a percentage of the outstanding loan amount as a pre-closure fee. Axis Bank, however, levies a reasonable charge of 2% plus applicable GST on the principal outstanding for pre-payment for the loans above 36 months.
RBI guidelines compliance: Axis Bank adheres strictly to RBI guidelines, ensuring that their charges do not exceed regulatory caps and are fair to consumers.
GST consideration: GST applies to the pre-closure fees, which are standard across the industry.
Also Read: Personal Loan repayment guide: mastering the art of savvy finances
Dealing with prepayment charges on Personal Loans
Calculate the break-even point: Use a pre-closure charges calculator to determine if the interest saved outweighs the prepayment penalty.
Negotiation: You can sometimes negotiate the pre-closure charges, especially if you have been a loyal customer with a good repayment history.
Loan transfer: If the charges are too high, consider transferring your loan to another lender with lower or no prepayment charges.
Gradual prepayments: Instead of a lump sum pre-closure, making gradual prepayments can be a strategy to reduce the loan burden without incurring high fees.
Timing the prepayment: Timing your prepayment after the lock-in period or when the charges are lower can reduce the cost of pre-closure.
Read the fine print: Before signing the loan agreement, understand the prepayment terms to avoid surprises later on.
Conclusion
A Personal Loan can be a powerful tool to bridge gaps and achieve goals. With Axis Bank Personal Loans, you are not just taking a loan; you're making a strategic financial decision that aligns with your aspirations and circumstances. It's not about the necessity of borrowing but the wisdom of choosing the right partner to empower your financial growth. So when you think of early loan closure or any financial leverage, think Axis Bank.
Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.
