Preclosure of a home loan or any other personal loan implies that the borrower closes the loan off before the term is done. Closing off a personal loan before the end of its term can be done for many things. It could be that you simply want to pay it off faster, or it could be just to save up more on interest. But the fact remains the same: nobody wants to have debt floating around.
A personal loan is highly popular in doing the purpose it serves: it makes the temporary or urgent need for money pretty quick and relatively easy.
Even if it does sound really good on paper, there are interest rates that you’ll be paying in any case if you close down the loan before its tenure ends. One of the major reasons for this is the fact that banks would lose a considerable amount of interest if you close down your loan before its tenure and hence would charge you for it.
What then, are the advantages of closing a loan early? If a loan can be paid beforehand or in full, there are a lot of advantages in store for the borrower!
Repaying the Loan in Full After a Year
Most banks in general make you continue with your loan for a full year, regardless of its duration. This is a limit, so to speak, that is imposed by them so that you don’t repay it in full within a month or two and so that they do not lose a considerable amount of interest. After this restriction for about a year, the remaining amount of the loan can be paid in full.
The tactic you can use here is repaying the entire amount of the loan pretty early into its tenure. Doing this would considerably bring down the overall interest you pay during the end of the loan tenure. This way of paying back a loan is basic economics. If doing this would make you obtain a lower interest overall when you eventually pay off your loan in the end it would make a whole lot of sense in following this method!
Repaying the Loan in Part
This is a wise choice when you have decided to pre-close your loan. How this works is, when you have a chunk of cash and you can spare to pay off the loan by some percent, then you can do so. A lot of advantages are associated with this method. For one, let’s take an example of you taking a loan of three lakh rupees. If you choose to follow this method of closing loans off, then you can repeat this as many times as you want until you are done with the loan. You can pay 1 lakh at a time, in bulk, whenever you have some cash to spare to close the borrowed amount. Your monthly tender could be ten-thousand rupees, or even twenty-thousand, but paying in bulk at regular or irregular intervals could really help you. Another advantage with this method is the fact that paying off in regular intervals in bulk could reduce your overall interest paid in the end. Hence, the reduction in the total amount of interest paid will be much more in the end, rather than closing it off in full, like the aforementioned method.
Your credit rating will likely go up, but not immediately as the process will be slow. In the end, however, it pays off. How? Reduction in your total loan amount can increase your credit scores as CIBIL, (the group which keeps a constant check on how effectively you pay your loans off and how responsibly you use your credit cards), will get the impression that you are able to pay your loans off soon enough. So, for example, let’s say that you have taken two or three different loans. And later on, you have paid off all your debt pretty soon. This would affect your credit rating positively, and give a much needed boost to your credit score.
Early Stage of the Tenure or the Remaining Stages of the Tenure
It would be very advantageous if you foreclose your loan depending on the remaining time of your loan. There is an initial lock-in period that banks usually impose keeping in mind the people who will look to pre-pay loans. When that initial period lock-in expires, you can pay off your loan in part or in full. Another time that you can pay off your loan in part or full would be when the tenure of the loan is about to expire. For example, let’s say that you have three lakh rupees remaining to be paid off in your loan and your tenure is about to end in a couple of months. This would be the best time you can pay off your loan in full. Keep in mind that the best way to do this is to ensure the amount of time that has transpired before you decide to do so, and then proceed.
Pre-payment can be beneficial if you implement it during the initial stages of the loan or as soon as the lock-in period ends. In case the bank in which you have taken the loan charges a penalty for prepayment or part payment, you can compare the amount you could possibly save with the cost of prepayment and then proceed to do so. In either case, what you can always do is discuss with your lender and read the terms and conditions carefully before you sign the dotted line for the loan contract!