All you need to know about Personal loan part payment and pre-closure

Over the years, there has been a steady increase in the number of personal loan borrowers due to the ready availability of personal credit/financing options from banks and non-banking financial companies (NBFCs) in the country. Personal loans are a popular financing tool as they are unsecured loans that can be used for any purpose. Before learning about personal loan preclosure, it is important to know the basics of personal loan which are explained below.

What is a personal loan?

A personal loan is an unsecured loan that does not require a guarantor or security. The borrower can repay the loan amount in equated monthly installments (EMIs) over a fixed loan tenure. The loan repayment period usually ranges from 1 year to 7 years. The interest rate on personal loans is higher than secured loans as the risk is higher in such loans due to the lack of collateral. Banks offer instant personal loans to employees working for a top-rated company. Eligible borrowers can benefit from easy loan application, minimum documentation, quick loan approval and disbursal. One can borrow up to Rs.25 lakh as personal loan.

What are the eligibility criteria of a personal loan?

As personal loans don’t require collateral, lenders focus on the income and credit history of the applicant. Personal loan applicants must have a good credit score of 750 and above. Salaried applicants must have a minimum annual income of Rs.1.5 lakh while self-employed applicants must have a minimum annual income of Rs.2 lakh. Applicants who meet the minimum income and credit score requirements of the lender have higher chances of loan approval than those who don’t.

Credit score of an individual represents his or her creditworthiness while the income represents the person’s repayment capacity. Lenders don’t approve loan applications that prove to be risky. Anyone aged 18 years and above, with a steady source of income, a good credit score, and a stable job can apply for a personal loan.

What is the purpose of a personal loan?

From purchasing big-ticket items to paying for one’s wedding, higher education, vacation or home renovation, personal loans can be used for any purpose without any restriction on the end use of the loan amount. Personal loans can be used to meet urgent financial requirements such as paying medical bills or debt consolidation. The loan amount can also be used to invest in equity instruments.

What is personal loan EMI?

Borrowers must repay the principal loan amount with interest each month over a specified duration to the lender called equated monthly installments. Personal loan EMI calculators can be found on the website of the lender or a third-party website. The calculator is easy to use and requires only a handful of pertinent details to get a breakdown of the personal loan repayment schedule. Details such as the loan amount, interest rate, loan tenure, and processing charges are required to calculate the loan EMI. The personal loan EMI calculator will give accurate results along with an amortisation table. The calculator can be used to choose the right loan tenure and loan amount. This, in turn, will ensure the personal loan is affordable and the borrower will not default on the loan.

What is personal loan part prepayment?

When a borrower repays a part of the loan amount in advance (before the EMI is due), it is called part prepayment. Part and full prepayment of personal loan come with a penalty fee which ranges from 2-5% on the outstanding loan amount. Some lenders allow only full prepayment of the outstanding loan amount.

What is personal loan preclosure?

When one has a sudden inflow of money in the form of salary bonus or investment returns, he or she can choose to preclose the personal loan so as to ease the financial burden of making EMI payments each month. When a borrower prepays the full outstanding loan amount before it is due, it is called loan preclosure.

What is personal loan preclosure charges?

Preclosure of a personal loan is entirely up to the borrower. However, preclosing a personal loan attracts preclosure charges which range from 3-5% on the outstanding loan amount. If the borrower chooses to preclose the loan right after the lock-in period then the penalty will be higher and if the preclosure happens closer to the end of the loan tenure, the penalty will be lower. Prepayment/preclosure of a loan is allowed only after a certain number of EMIs have been paid by the borrower. The terms and conditions of preclosure vary with lenders. Therefore, when applying for a personal loan, it is important to compare the preclosure charges and terms set by different lenders.

How does personal loan preclosure affect credit score?

Although preclosing a personal loan reduces the burden of paying EMIs each month, it has a negative impact on one’s credit score. Timely EMI payments improve a borrower’s credit score, and when a loan is preclosed, it takes away that opportunity.

Things to keep in mind before opting for personal loan preclosure

  • Find out what is the preclosure charge levied by the lender. Read the terms and conditions of loan preclosure carefully.
  • Find out what is the lock-in period of a personal loan. Some lenders allow borrowers to preclose the loan after a lock-in period of 1 year/12 months/12 EMI payments.
  • Find out if the interest due for the remaining loan tenure is more than the preclosure penalty. If the interest payable is less than the preclosure charge, then one may very well pay the loan when it is due and not in advance. On the other hand, if the interest due is higher than the preclosure charge, then choose to preclose the loan.
  • Find out if the money saved to preclose a loan can be used for an investment that offers better returns in comparison to saving on the interest due on the outstanding loan amount. If the investment returns is higher, then don’t opt for loan preclosure.
  • Find out if the money saved to preclose a loan can be set aside for the emergency fund so as to retain financial stability even in an hour of need.

What is the process for personal loan preclosure?

Visit the bank branch with a set of required documents such as the personal loan account number, identity proof (PAN, Aadhaar card, ration card, or driving licence), address proof, a cheque or demand draft (DD), and loan account statement. Submit a written letter requesting preclosure of the personal loan. The bank official will inform the borrower of the payable amount. The amount due can be paid using a cheque or DD. In return, an acknowledgement receipt of the prepayment will be given to the borrower. Once the amount is processed, the personal loan account will be closed, and the closing document will be given to the borrower.