Published on Sept 29, 2020Updated on Oct 15, 2026
Life is not a bed of roses; it has its ups and downs which we have to endure with grit and courage. But, there are situations when we have to look beyond our financial means to overcome it. At such a time, the personal loan comes as a great savior. They are easily available and offer great flexibility in terms of usage, tenure, and repayment.
And, at some point, if your financial situation turns around, you can foreclose the loan and enjoy a debt-free life. But, before paying off a personal loan early, you need to weigh all the pros and cons of personal loan prepayment.
Let’s first understand the factors affecting personal loan prepayment
Every lender inserts a prepayment penalty clause in the personal loan documents, which states the percentage of the amount that will be charged if you decide to pay off the loan early. Lenders usually charge this fee as prepayment or foreclosure causes them to make a lot of changes in their internal systems, which often comes at a cost. At the same time, borrowers are also encouraged to pay the monthly EMIs on time and save more money in the long term.
As per the RBI directive, lenders can only charge prepayment fees on the outstanding loan amount. At SMFG India Credit, you can choose to foreclose your loan if you are willing to pay the remaining outstanding amount (with dues) in full. Our foreclosure charges range between 2-7% (depending on SMFG India Credit’s policy at the time of foreclosure application).
Must Read: Difference Between Short Term and Long Term Loans
If the lender doesn’t charge any prepayment fee, the borrower stands to benefit from prepayment as they can save on the interest amount.
But, if there is a prepayment fee, the actual benefit for borrowers depends on the remaining tenure of the loan, outstanding loan amount, and prepayment charges. So, how do you calculate the actual benefits?
You can either use an online calculator to check your Personal Loan Prepayment savings by paying early. Or, calculate the total interest outgo for the outstanding loan amount manually. If the interest outgo amount is greater than the prepayment fee, you benefit by repaying your dues.
Paying off your loan can be a good decision and offers you multiple benefits.
In case, you opt for full prepayment of the entire outstanding loan amount, you tend to save a lot on interest outgo.
For example, in a personal loan amount of Rs 3 lakh at an interest rate of 12.5% and a term of 5 years, the EMI for the loan comes in at Rs 6,673, with total interest payable is Rs 1,00,400. If the customer decides on full prepayment at the end of the first year, the total interest savings will be approximately Rs 66,907.
A spotless credit report with clean loan repayment records is more desirable and lenders also prefer giving a loan to such users.
Full prepayment or foreclosure of your ongoing personal loan is considered positive and helps to increase CIBIL score. An improved score helps to successfully close your next loan application and also bargain for more favorable terms from the lender. This is not applicable, however, in the case, the foreclosure is done with the intention of a personal loan balance transfer.
Being debt-free has its own advantages. It leads to a stress-free life, enables you to attain financial independence earlier, reduces the risk of financial failure, and more disposable income in your hands.
Some of the disadvantages of paying off personal loan early:
As the saying goes, Cash is King and having a sufficient amount of cash in hand gives confidence and ability to fight small emergencies or cater to immediate requirements.
By making a prepayment in a lump sum, you will be losing your financial flexibility and may stand at the risk of financial failure.
You are liable to pay the charges if you choose to foreclose your loan early. This includes foreclosure charges, administrative charges, and other fees.
Must Read: Complete Guide About SMFG India Credit Personal Loan
Bottom Line
Before exercising the option of prepayment of personal loans, it is important to consider all the factors discussed above. If you are gaining significantly from the entire transaction, then only you should go ahead with the transaction.
Important Note: This article is for general informational purposes only and may be subject to change from time to time. As product features, eligibility criteria, interest rates, charges, fees, tenures and other terms may be revised as per SMFG India Credit's policies, readers are advised to refer to the latest details from the respective product pages (please select from the top menu). For the latest loan charges, please visit Charges & Fees Link and for the latest Interest rates, please visit Interest Rate Rationale. Please note that final loan terms, disbursement process and eligibility criteria will depend on SMFG India Credit's policies at the time of loan application.
The content of this article is for information purposes only and does not constitute as, an offer or advise to avail any products or services from, or, a commitment to grant any loan by the company. It is not intended to create any rights or obligations against us. All content is provided "as is" without any warranty of any kind, either express or implied & we disclaim any warranty or representation, whatsoever, in regards to the content. Please refer to the Privacy Policy of the company to understand the use, processing and storage of your personal data.
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