None of us are always financially well-equipped to meet unforeseen situations that arise in our lives from time to time. More than often, even our savings fall short to meet our utmost urgent financial needs.These are the times when most of us turn to availing a quick loan to ease out our problems. Today, availing a loan may not be as difficult as it used to be earlier, but there is one thing that still remains the same – the cumbersome task of paying out the loan amount for a predefined span of time.
In terms of repaying loan amount, some borrowers are often luckier than others as they are able to accumulate enough amount of money to consider loan tenure prepayment.
In simpler words, prepayment of loan taken can be explained as a situation where a person who has borrowed a loan decides to pay the amount of loan taken earlier than the tenure set for them by the lending institution. Such a decision is often triggered to avail the benefit of optional refinancing in terms of lower rates of interest.
Prepay or Not To Prepay?
Many borrowers consider prepayment of their loan amount mainly because of two reasons. Either they have accumulated enough cash through sudden inflow of income that they want to remove the burden of the loan from their shoulder before the allotted tenure or they want to avoid the leaping rate of interest levied by the financial institutions on the offered loan. But the real question is should borrowers really opt for loan tenure prepayment?
As a general rule, if one has sufficient cash to comfortably repay the loan before the set due date, one should immediately go ahead with the prepayment. But if the borrower falls under any of these below-mentioned exceptions, they should reconsider their decision of loan tenure prepayment:
- In the case, where the borrower has availed a fixed interest loan at an interest rate that is lower than the currently prevailing in the financial scenario
- In the case, where the borrowers have availed an additional tax benefit on their said loan under section 80C.
A person who has availed a loan must analyse the advantages and disadvantages of such exceptions carefully and in details before making a final decision about repayment of their loan.
What to remember before finalising your prepayment option?
If a borrower is halfway through, aloan tenure prepayment is a good option for them. They can either opt for a full prepayment of their loan amount or opt for the option or repaying the lump sum taken as a loan through part payment settlement. Even the fact that some banks and prominent financial institutions charge their customers a penalty at the rate of 3%-5% on their decision of loan tenure prepayment is a decisive factor for some borrowers.
The option of part payment is favourable for some borrowers because such an option brings down the outstanding principal loan amount. A decrease in the principal loan amount also leads to a decrease in the interest accrued on the outstanding loan amount.
The following should be kept in mind while opting for a prepayment option:
- Most borrowers tend to harbour a wrong notion that prepaying their loan is actually very unfavourable for them, especially when they are already halfway through their tenure. They have the belief that the rate of interest may undergo a massive change in the following months that will impact their outstanding amount in a way that will not be in their favour.
- What most borrowers tend to forget is that the interest rate on outstanding principal loan amount remains the same throughout the tenure.
- The rate of interest on most loans is calculated through the application of reducing balance method. Such a method ensures a reduction in the amount of total interest accrued on the outstanding loan amount throughout the tenure. Though the outstanding principal loan amount may alter depending upon the amount of payouts meted out towards it by the borrower from time to time the rate at which the interest would be charged would remain same throughout.
Rest assured, one can say with certainty that no matter which stage of personal loan tenure you are in, your decision of prepayment shouldn’t be affected by it. Consider other factors like the availability of cash and your personal financial standing to decide it.