How to Calculate Prepayment of Personal Loan?

Personal loans come in handy when we are facing a mid-life financial crisis and need immediate funds to get the situation under control. However, once the purpose has been served, who does not like to live a debt-free life and that is when the entire scenario of personal loan prepayment comes into question. It is when someone is ready to pay off the remaining amount before the due date that the loan was scheduled to expire. 

Now the question arises, as to how to calculate prepayment of a personal loan? What are the benefits and drawbacks (if any)? Don’t worry! We have got you covered. 

How to calculate personal loan prepayment?

There are various online calculators made available, making it easy for the borrowers to foresee the exact amount that they need to pay. All that is required is the entire loan amount and the prescheduled interest rate. And voila! Your work is done. Below we have listed the required steps in detail, providing adequate support. 

• Set the principal loan amount by using the ‘Loan Amount Slider’.
• Set the tenure either months/year using the ‘Tenure Slider’.
• Insert the prescheduled interest rate. 
• Update the part payment amount.
• Click on ‘apply now’ and get to know the actual amount.  

However, banks and NBFCs do claim additional charges over the stipulated loan amount and it varies between zero to 5%. Also, some calculate the prepayment penalty based on either a differential interest method or a fixed rate. A minimum lock-in period is made mandatory within which the borrower cannot repay the authorised loan amount. 

Personal loan prepayment benefits

Personal loan prepayment facility comes with its own set of benefits, read on to know more.

Debt Free: Personal loans are the best when it comes to meeting sudden financial crises, making your life a lot easier. However, once the situation is under control the accumulated interest amount and monthly EMIs can be quite a burden to escort bayan ataşehir maintain. Paying off those using surplus funds lightens up the entire mood. Now, the individual can focus on other essential requirements rather than only thinking about the borrowed amount day and night. 

Reduced rate of interest: Ideally it is best to prepay the loan early, in case you have sufficient funds. At times, banks and NBFCs have a lock-in period of their own, preventing borrowers from prepaying back the loan amount. However, you are free to pay back in full, once that period is over. 

Improvement in credit score: As outstanding loans and credit scores are directly linked with each other. Prepayment of loans in partial or full amount enhances the credit score in real-time. Thus clearing out your chances of getting the next loan application approved for sure.

Personal loan prepayment drawbacks

Prepaying off a personal loan can exert the following drawbacks.

Cause depletion in liquid cash: Liquid Cash makes it easier for individuals to run errands without having to apply for a new loan or borrow money from friends or family in general. Prepaying a previously borrowed loan amount can cause a cash crunch all of a sudden. Making the person go through similar financial instability that he/she was trying to recover from in the past. So a thorough analysis of the present financial situation is necessary before jumping to conclusions of any sort.  

Entitle the borrower to pay prepayment penalties: There are banks/NBFCs who charge a stipulated amount as a penalty when a borrower tries to prepay the loan amount before the due date. The percentage varies between 0 to 5 and is negotiable. The borrower needs to indulge in a thorough discussion with his/her lender, without moving forward to pay extras than necessary.  

Is prepaying a personal loan a good idea?

Prepaying a personal loan before the due date is directly proportional to the aim a borrower wants to serve. 

• In case the prepayment is initiated to save on the interest rate, then it is ideal to carry on with the payment process either in the early stage or just after the lock-in period.
• If it is to improve your credit score, then surely prepaying loans will land you in the good books.

However, do make sure to list out all the pros and cons before prepaying your loan amount. And do not end up paying more than the calculated amount, termed as prepayment penalty by individual banks/NBFCs.  

It is always a good decision to seek advice from a financial mentor before proceeding forward with loan prepayments and related decisions. In modern times, personal loans are quite a saviour when it comes to meeting up with the immediate crisis that a person faces in his/her daily life. Do make sure to pay off the EMIs on time and maintain a healthy relationship with your lenders, as this will fetch you quick funds shortly.