Personal Loan

Personal Loan Prepayment – How to do it?

18 Nov 2019 5 min read
Personal Loan: Know About Personal Loan Prepayment | Afinoz

It’s quite sensible to say that a personal loan is one of the most sought after financial products. Its flexibility and ease of approval makes it a popular choice for those who are looking for debt consolidation or planning a vacation or to meet emergency expenses. Since there is no restriction on the usage of the personal loan amount, it becomes the easiest way to meet different expenses. However, it's important to note here that personal loan comes at a higher interest rate, so if you are planning to apply for the same, make sure that you do the comparative analysis of the interest rates offered by different banks.

Personal Loan Repayment

You must repay the personal loan on time. Late payment or lapse in the payment can impact the credit score, thereby reducing the probability of you getting approval on future loan applications. One of the questions that arise here is whether one can prepay the loan and are there any charges on the same. Let's unfold the details.

What is Loan Prepayment?

As evident from the word, "Prepayment" means early payment of the loan. In simple words, you pay off the personal loan before the allocated tenure. This usually happens when people have a large sum of money, and they are ready to repay the loan. It will lead to either reduction in the EMI or tenure of the loan. 

The idea is to pay off the loan before time. However, it may involve some charges. Many banks and financial institutions have the provision of personal loan prepayment, but you may have to incur some extra cost on the same. When you apply for a personal loan, while shortlisting the banks on different parameters, you also need to enquire about the prepayment charges levied by the bank.

What are the pre-payment charges?

Banks usually ask for some extra charge when the borrower decides to prepay the loan. Prepaying the loan would mean lesser interest for the bank and hence it’s always good to check with the bank about the prepayment charges. Well, different banks may have different pre-payment charges, and it may range from 1% to 5%, so the best way out is to enquire about the same from your bank proactively. 

There is also a provision of flat pre-payment charges, while others may have varying rates. For example, ICICI Bank has a flat pre-payment charge of 5% per annum on the principal outstanding amount. But, HDFC personal loan has different pre-payment rate, in the first year, the HDFC bank charges 4% interest rate on the principal outstanding amount, while in the second year it becomes 3% and in the third year it is 2% on the principal outstanding amount. 

Tabular representation of pre-payment charges offered by different banks and NBFCs:

Name of the Bank

Pre-payment Charges

HDFC Bank

In the first year the prepayment charge is 4%                                                

In the second year the prepayment charge is 3%                                                                     

In the third year the prepayment charge is 2% of the outstanding amount

ICICI Bank

Flat 5% on the outstanding amount

YES Bank 

In the first year, the prepayment charge is 4%

In the second year, the prepayment charge is 3%                                                                     

In the third year, the prepayment charge is 2% of outstanding amount

More than 3 years, there is no prepayment charge

Kotak Mahindra Bank

Up to 4%

SBI

3% on the prepaid amount

IDBI Bank

If prepayment is done before 6 months, then prepayment charge is 2% and after that there no prepayment charges. 

Yes Bank

You can do prepayment after paying 12 EMIs and after that the borrower will be charged a pre-closure charge of up to 4%

Citi Bank

Allowed after 1 year, after that a charge of  4% on total outstanding amount is levied

Standard Chartered Bank

It is allowed after completing 12 EMIs and giving 21 days’ notice to the bank. Then one has to pay a charge of 5% on the outstanding amount.

IndusInd Bank

Salaried individuals can do the prepayment after paying 12 EMIs, while the self-employed individuals can prepay after paying 6 EMIs. The interest rate charged for prepayment is 4% on the outstanding amount.

Bajaj Finserv

2% – 3% of the principal outstanding

Does prepayment impact credit rating?

One of the advantages of prepayment of personal loan is that full prepayment means successful closing of a loan account, which means that you have good creditworthiness, and thus, it impacts the credit score positively. But, you must know here that part prepayment will not impact the credit rating, but it will reduce the burden of the loan. So, if you are looking forward to improving your credit ratings, then you must go for complete prepayment. 

Benefits of Personal Loan Prepayment

Free from debt

One of the reasons people go for a personal loan is that they need money to meet immediate financial expenses. But, it comes at a higher interest rate. Prepaying the loan will make it easy for you to overcome the burden of debt.

Save on interest rate

 Another benefit of personal loan prepayment is that it saves the interest rate. Most of the banks have a lock-in period, which means that you can prepay the loan only after paying off certain EMIs. You can prepay the loan and save on the interest rate.

So, if you have been thinking about prepaying the loan, you must think about the pros and cons. Personal loan prepayment comes at an interest rate, and you can only go ahead with it, once you have crossed the lock-in period. Sometimes, these charges may be higher. So consider this as the shortlisting parameter while you go ahead with choosing a bank for personal loan application. 

The Bottom Line

Personal loan prepayment can only be helpful if you prepay the loan amount in the earlier phase, i.e., as soon as your lock-in period gets over. It’s a great way to overcome the burden of continuously paying the EMIs. Moreover, you can also improve the credit score by going ahead with complete pre-payment of your personal loan.