What Is Personal Loan Prepayment and How Does It Work?

Personal loan prepayment refers to the process of repaying your loan, either partially or fully, before the end of the scheduled tenure.

However, first-time borrowers often have questions about how it works, its benefits and drawbacks, and how to decide when prepayment makes financial sense.

This article will cover all key aspects of prepayment of personal loans, so that you can make informed and confident decisions.

What Is Personal Loan Prepayment?

Firstly, let us discuss what prepayment of a personal loan means and what it entails.

As the term suggests, ‘prepayment’ refers to paying off your personal loan before the designated repayment tenure finishes. This is a scenario where the primary applicant has access to funds that can cover the principal loan amount and any applicable interest till the date of the agreed prepayment.

But why pay off your personal loan before time is the question. Primarily, this would be a good option because, in most cases, it would help you save on the interest component that the principal loan accrues throughout the repayment tenure. It would also enable you to successfully clear your debt and free up your finances.

That said, there are some applicable fees and charges if you choose to foreclose your personal loan, which we will discuss in the next few sections.

Prepayment Clauses

Before opting for personal loan prepayment, it’s important to understand the terms that govern it. These prepayment clauses define the conditions, restrictions, and potential costs involved in repaying your loan before the agreed tenure.

Here's what to look out for:

1. Prepayment Penalty

Some lenders charge a prepayment penalty, either a percentage of the outstanding loan amount or a flat fee. Always check this clause before choosing to prepay your personal loan.

2. Partial Prepayment Restrictions

Some lenders only allow prepayment of personal loans in full, meaning you must repay the entire outstanding balance in one go.

3. Prepayment Notice

Depending on the lender's policy, you may be required to give prior notice (say 30 days) before making a personal loan prepayment. Failing to do so could result in additional charges or processing delays.

Personal Loan Prepayment Fees & Charges

SMFG India Credit levies certain charges and fees when you opt to pre-close a loan. The main reason for this is that pre-closing a loan requires a lot of processing and coordination on our end. The charges which are levied on you are a part of the same. However, if a certain number of EMIs have been paid, we don’t levy any foreclosure charges.

Please also note that at SMFG India Credit, we only accept prepayment of personal loans in full – that is, if you would like to prepay your loan, you should be willing to pay off the entire amount that is outstanding.

Take a look at SMFG India Credit’s detailed foreclosure charges:

Please note that as per our current policy, we only accept prepayments on personal loans in full. Thus, if you wish to prepay or foreclose your personal loan, you must be prepared to repay the entire outstanding amount along with applicable fees and charges.

Personal Loan Prepayment Procedure

1. You can submit a formal prepayment request by either calling our customer service desk on the toll-free number 1800 103 6001, emailing us at [email protected] or visiting your nearest branch.
2. You can also raise the request through your unique login details to the customer service portal.
3. Our representative will respond to your request with a tentative date by which the personal loan can be foreclosed on receipt of your request. You will also be given a foreclosure ID for reference.
4. Once you have the foreclosure ID with you, proceed to the nearest SMFG India Credit branch to make your full prepayment towards your personal loan.
5. The process will now be complete. You will be handed an acknowledgement of the payment made towards the foreclosure of your loan.

By considering these factors, you can make an informed decision about whether or not to prepay your personal loan.

Pros of Personal Loan Prepayment

Here are five key advantages of prepaying your personal loans:

1. Prepaying loans can reduce overall interest expenses, resulting in significant cost savings.
2. By decreasing the unpaid interest component through prepayment, the outstanding principal amount of the loan can be brought down, resulting in a shorter loan tenure.
3. These cost savings can be utilised for additional investments, thereby increasing your overall savings and improving your financial health.
4. By showcasing responsible repayment behaviour through prepayment, you can positively impact your credit score.
5. Prepayment of loans can offer financial flexibility, allowing you to achieve your financial goals with ease and efficiency.

Cons of Personal Loan Prepayment

Prepaying a personal loan can have some drawbacks, too. Some of them are:

1. Prepaying a personal loan requires a substantial lump-sum amount that can affect your financial stability, so exercise caution and evaluate your financial situation before committing to prepayment.
2. Using liquid assets for prepayment may jeopardise your financial flexibility and pose significant challenges if unexpected emergencies arise in the future.
3. Lenders may impose foreclosure charges if you decide to close the loan before the agreed tenure concludes, so review the terms and conditions of your loan agreement to understand any potential foreclosure charges.

Related Read: Pros and Cons of Personal Loan Prepayment in India

How to Decide If Prepaying Your Personal Loan Is Right for You

Choosing personal loan prepayment can be financially rewarding, but it might not always be the best decision in every instance.

Here are a few important factors to consider before making a choice:

1. Compare Interest vs. Prepayment Charges

Calculate how much interest you’ll potentially save versus any prepayment charges or penalties.

2. Check Your Loan’s Stage

Prepayment of a personal loan is generally more beneficial during the early months when interest forms a major part of your EMI.

3. Evaluate Your Liquidity

If prepaying your loan, especially in full, significantly impacts your emergency fund or disrupts other essential investments, it may be wiser to wait.

4. Look at Your Financial Goals

If becoming debt-free aligns with your short-term goals, prepaying a personal loan can help reduce financial stress.

Always assess your full financial picture before choosing to prepay your loan.

Conclusion

When considering personal loans, it is important to think carefully. While prepayment can be beneficial by reducing interest costs and improving financial flexibility, it also has potential drawbacks, such as requiring lump-sum payments and foreclosure charges. You should understand some prepayment clauses and their pros and cons.

This will help ensure that your financial decisions align with your long-term goals, whether you choose to proceed with prepayment or stick to the original payment schedule.

If you’re exploring personal loan options, SMFG India Credit offers funding of up to INR 30 lakhs* with the flexibility to prepay in full at nominal charges*. Check your eligibility and apply online today to take advantage of competitive interest rates and flexible repayment tenures.