A personal loan is one of the most widely used credit products which allows consumers to use the funds for any reason they wish. Personal loans are unsecured loans and are not liable to be used for any reason, in the sense that a car loan only allows you to buy a car and a home loan allows you to only buy a home. You can use a personal loan to meet any sort of personal expense.
In the event of a financial crunch or an emergency, you can always take a personal loan as per your eligibility. When it comes to closing a personal loan, you can pay it off through regular EMIs or pre-close the same if you can afford to pay it off immediately. The advantage of pre-closing a personal loan will not only reduce the burden of your overall debt but also help you save money. But before you consider pre-closure of your personal loan, there are a few things that you should know.
1) Charges For Pre-Closure
Most banks and NBFCs charge a pre-closure fee when you decide to pay off a loan beforehand. In general, the pre-closure fee is charged at the rate of 1% to 5% of the outstanding loan balance. However, if you are pre-closing a loan quickly, the chances are that you will incur an additional amount for the pre-closure but you will still save a significant amount on loan interest.
2) Impact On Credit Score
The full repayment of any loan will normally have a positive impact on your credit score. However, the results could vary from one borrower to another. If you’re looking to improve your credit score, the timely payment of monthly EMIs for the full course of the loan will help you improve your credit score. Whether you pay as per the tenure or pre-close, you should follow up its impact by making monthly checks on your credit score.
3) Early Pre-Closure Vs. Late Pre-Closure
If you have repaid a significant part of your loan through regular instalments, you may not benefit a great deal from pre-closure. In a reducing balance loan, the interest is normally collected up front in your EMIs. Therefore, towards the end of your loan, most of your EMIs are adjusted against the principal. Therefore, pre-closure in the early stages of the loan may help you save more…Read more>>