Many people think about early loan pay-off when they have extra money, from savings or an unplanned windfall. Prepayment isn’t always advantageous, though, and the choice you make and the result you desire depend on many variables.
While thinking about prepayment of your Rs. 5 lakh personal loan, you must consider the following important factors:
- Penalties related to prepayment: Usually banks and lending companies charge prepayment fees to customers for early payment of Rs. 5 lakh loan balance in full or in part. While some lenders charge absolutely no fees at all, others charge a percentage of the amount to be prepaid. Therefore, consumers are advised to confirm that the prepayment penalties linked to their loan are reasonable, particularly in cases when choosing the prepayment option would not result in possible interest savings.
- One major myth that has to be dispelled is the belief that early personal loan pay-off will only cause instant interest savings instead of long-term savings. Actually, interest savings follow through into later phases. Prepayment will lessen your 5 lakh loan debt, hence the interest you pay on that amount will surely be less than it would have been otherwise.
- Using the reducing balance approach, the borrower determines the outstanding balance of a personal loan paying the same interest rate. As such, one should take the current interest rate into account while assessing prepayment instead of loan length.
- Moreover, early repayment benefits mostly from total interest cost savings since personal loans have short to medium terms ranging from one to five years. Proceed just in cases where the savings are significant and exceed the related costs.
Effect on the Emergency Fund: Consider whether your emergency savings are running low when you decide whether or not to pay off your personal loan early. If this is the case, ignore the prepayment; emergency funds are meant to help you in times of great need, such as a major illness, the loss of your job, etc. when you lack immediate access to money.
It is thus advised against using emergency funds to pay debt. Make sure your emergency fund stays untouchable and sufficiently big as the time for loan closure or prepayment gets close. If you have an existing SBI Personal Loan Apply for prepayment considering the early repayment penalties.
Also, there could be chances that SBI personal loan for govt employees comes with different prepayment conditions and penalties than that for private employees.
Present returns on investment: The returns on your current investments could also affect your choice for an early 5 lakh loan pay-off. Examine the rate of return on your present investments like fixed deposits, bonds, mutual funds, and insurance. Only pay off your loan if your investments match a specific goal or intention and are not being used or redeemed for prepayment.
The loss of possibilities brought on by neglecting investment: The sum of money lost by selecting one course of action over another is the opportunity cost. Not investing basically results in the returns on investment you would have otherwise gotten if you had paid off your loan early. Therefore, you should only think about early loan repayment if the interest savings exceed the possible losses from skipping mutual funds, real estate, insurance, or other alternatives.
Having more understanding of personal loan prepayment, you should consider the advantages and disadvantages before deciding.
- Reduced loan’s total interest cost
Those who have SBI personal loan apply for prepayment of the loan usually during the early repayment period in order to save on paying too high interest. There is a common belief, though, that interest costs cannot be avoided in the later stages of a loan but only in the first ones. Typically, interest savings follow into the next years. The online personal loan prepayment calculator makes figuring the interest savings from an early repayment easy. After deducting any pertinent prepayment penalties, kindly only select this option if you believe there is a good chance you will save a significant sum of money.
- Lowers the EMI ratio using income
Loan applicants with an equated monthly instalment (EMI) to net monthly income (NMI) or gross monthly income (GMI) ratio between 50 and 60% get preference from lenders. This relates to the new as well as the current loan interest payments. Current personal loan borrowers can thus increase their chances of being approved for a 5 lakh loan by making personal loan prepayments, which will reduce their EMI/NMI or GMI ratio if they intend to take out another loan, say a house loan or a car loan and exceed the limit of their EMI/NMI ratio.
- Balances the overall credit mix
One of the elements the credit bureaus take into account while computing a credit score is a person’s credit mix, that is the proportion of their secured and unsecured loans. Because these loans account for a greater share of the borrower’s credit mix and credit bureaus typically assign these borrowers high scores, lenders typically favour lending to borrowers with secured loans like home loans, auto loans, and loans secured by real estate. Since personal loans are unsecured, including more of them in your credit mix could cause your credit score to drop. Paying off unsecured debt like your personal loan earns you more secured debt overall, which will greatly increase your credit score.
- Penalties for early payments
Prepayment penalties apply solely to fixed-interest personal loans; loans with variable interest rates are not covered. Prepayment penalties for fixed-interest personal loans vary depending on the lender; they can equal up to 5% of the principal amount. Most fixed interest rate lenders do not let partial 5 lakh loan prepayment, or they may only allow it following the borrower has made the necessary minimum number of minimum EMI payments over the loan. Knowing this helps one to proceed with the Personal Loan application.
- More liquidity
Because of the high interest rates linked with personal loans, many borrowers choose to pay off their debt using investments meant for critical financial goals or emergency funds. Doing this, though, could make it more difficult for you to handle unanticipated expenses or income loss resulting from job loss, illness, or disability. You might finally have to apply for higher-interest loans to pay for those unavoidable expenses when investments meant for major financial goals run out. Therefore, only consider paying off your personal loan if you have enough left over after deducting monthly payments towards your inevitable financial goals, emergency savings, and investments.
