Loans are an assured and accepted way of funding expensive purchases that you initially cannot afford. Many individuals today opt for Personal Loans to meet certain expenses buying high-end gadgets, going on a vacation, celebrating a wedding, conducting home improvement projects, or funding medical expenses, among others. While loans are convenient and serve as a fitting way to borrow money, you need to find the best loan for you after taking into account various factors.
Besides the loan tenure and interest rate you need to pay, you also have to look into the loan pre-payment penalty. Not sure what it is all about? Don’t worry; we help you understand this concept in a better way.
Why do people think of pre-paying a loan?
Staying in debt is worrying, even if the terms and conditions put forth by your lender are good. Obtaining those daily, weekly or monthly bills are an exhausting affair, and there is always the fear of not paying your EMIs on time. In this situation, pre-paying your loan can seem tempting. It serves as a logical way to free yourself from the burden of those pending payments, improve your cash flow, and gain control over the money you spend.
However, pre-paying a loan can come with its fair share of troubles. Before you make a massive payment in one go, you need to know more about the pre-payment penalty that many lenders levy.
Pre-payment penalty and why do lenders charge it
Paying your loan before a specific period can seem appealing, but it comes with a penalty. The prepayment penalty primarily refers to a fee lenders charge borrowers, when they pay off a loan before the loan term comes to an end. Even though it may sound appealing to pay off your loan quickly, you may be surprised to learn that in many cases paying off your loan sooner rather than later is not possible. No matter what Personal Loan offers you have signed up for, certain loans are specifically designed to last a certain number of years.
To know whether a penalty is part of your loan agreement, reading the fine print carefully is imperative. This is because if the agreement states that a pre-payment penalty exists, you inevitably have to pay one. Pre-payment penalties indirectly or directly rely on your remaining loan balance. Your penalty is generally smaller if you have your loan for a longer time and you owe comparatively less. If you are paying off a loan a few months earlier, you have to pay a smaller fee.
Do all loans come with pre-payment penalties?
Generally speaking, all loans do not come with pre-payment penalties. In fact, many lending institutions are less inclined to charge pre-payment penalties to borrowers. So, the trend is diminishing by the day. Having said that, it is a fact that these fees still exist. In certain conditions, they serve as a plus point for a few borrowers.
Along with every other provision in your loan agreement, pre-payment penalties come with tradeoffs. In this case, there is no denying that you get reprimanded for paying your loan off early, but there is something you can get in return as well. Agreeing to a penalty provision permits you to obtain a lower interest rate on your loan. There are also instances when lenders will not approve a loan unless you agree to a pre-payment penalty.
Pre-payment penalties for Personal Loans
Personal Loans Online Approval is easy, and usually, the loan amount gets disbursed within seven working days of the loan application getting approved by the lender. When it comes to pre-payment penalties, there are a few banks that permit borrowers to prepay only after they make a few repayments. On the other hand, some banks do not allow partial pre-payment. It is better to confirm with the bank in advance before signing on the dotted line.
Banks charge pre-payment charges on the outstanding loan amount. Some banks come with 0% pre-payment fee while there are others that charge anywhere from 2% to 5% of the outstanding loan amount.
Things you need to know
There are only specific kinds of pre-payments that lead to a penalty. You may be allowed to prepay a particular portion of your loan every year if your loan agreement permits you to do so. Additionally, as a result of selling your home, lenders may allow you to pre-pay the mortgage. When it comes to pre-payment as a result of refinancing, however, the chances are high that the lender will impose a penalty. The lender does this mainly as an attempt to retain your business. They do not want you to move elsewhere, even if you find a better financing alternative.
So, in those instances, when you receive a bonus at work or have enough savings in your budget, be attentive when you choose to clear the personal loan before its tenure. Remember, pre-paying your loan does not always imply that you are saving money. It holds true even if there is no official pre-payment penalty clause in the agreement. By paying early, you either save money on interest or you don’t.
Also Read: Soothe Your Wanderlust with Holiday Loans
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