Although a personal loan looks appealing for most individuals yet, in the long run, it can prove to be painful pertaining to the long repayment period and high interest rates. No doubt that personal loan is your way-out of a financial crisis but what after the money crunch is over and you have access to ample funds. Now you can either keep these funds in your bank accounts, use them to make investments or can pay-off your personal loan. While keeping these funds in your bank account may not serve any purpose, paying off your debt can relieve the monthly tension from your income and keep the loan from hurting your FOIR.
You can pay-off your debt anytime by informing your bank, once the loan lock-in period is over. This advance payment is referred to as loan prepayment or loan pre-closure charges and can help you save on interest payable towards the personal loan. If you have the entire amount of loan, you can also choose to opt for a personal loan pre-closure facility.
What is Personal Loan Pre-closure?
The pre-closure of any loan means that the loan is paid off before the entire tenure of the loan is over. That is, the loan amount is paid in advance of the respective repayment schedule. The loan can be pre-paid either fully or partially. In case the loan is paid-off fully, the phenomenon is known as pre-closure of the loan as now the loan has been closed permanently and no future payments are to be made towards it.
In case of partial pre-payment of a personal loan, a borrower pays some percentage of his outstanding loan amount beforehand. This helps a borrower save on the interest payment as now he has to pay interest only on the pending loan amount. There are certain banks and financial institutes who do not allow the partial pre-payment of a personal loan. These are:
- Kotak Bank
- IndusInd Bank
- Aditya Birla Finance
- Indiabulls Dhani
- Federal Bank
- RBL Bank
- Corporation Bank
- Capital First (IDFC First)
It is to be noted here that neither partial prepayment nor full pre-closure is allowed before the lock-in period for a personal loan is over. This period is specifically mentioned in your respective loan statement and neither partial prepayment nor full pre-closure is permitted before the completion of this lock-in period. This lock-in period varies from bank-to-bank and usually ranges between 6 to 12 months.
What is Personal Loan Pre-closure Charge?
Since the lenders are losing some proportion of their profit by pre-closing the loan, they levy some charge as a penalty on the borrower. This charge is termed as pre-closure charge and usually ranges between 2% to 4% of the outstanding principal payment for a personal loan. However, certain lenders can even levy a pre-closure charge amounting to a whopping 7% of the pending principal loan amount.
In the table given below, we have provided details of pre-closure charges levied by major financial institutes.
|Bank/FI||Prepayment Charges||Part-Payment Charges|
|HDFC Bank||2% to 4% of the Principal Outstanding Amount||2% to 4% of the Part-Payment Amount|
|YES Bank||2% to 4% of the Principal Outstanding Amount||1% of the Part-Payment Amount|
|SBI||0% to 3% of the Prepaid Amount||0% to 3% of the Prepaid Amount|
|ICICI Bank||5% of the Principal Outstanding Amount||5% of the Principal Outstanding Amount|
|Citibank||0% to 3% of the Principal Outstanding Amount||3% of the Part-payment Amount|
|Kotak Bank||5% of the Principal Outstanding Amount||Part-payment Not Allowed|
|Standard Chartered Bank||1% to 5% of the Principal Outstanding Amount||2% to 3% of the Part-payment Amount|
|Bajaj Finserv||0% to 4% of the Principal Outstanding Amount||0% to 2% of the Part-payment Amount|
|IDFC First||5% of the Principal Outstanding Amount||Part-payment Not Allowed|
|Indusind Bank||4% of the Principal Outstanding Amount||Part-payment Not Allowed|
|Indiabulls Dhani||5% of the Principal Outstanding Amount||Part-payment Not Allowed|
|Aditya Birla Finance||NIL||Part-payment Not Allowed|
|IDBI Bank||0% to 2% of the Principal Outstanding Amount||0% to 2% of the Part-payment Amount|
|HSBC Bank||Up to 3% of the Principal Outstanding Amount||Up to 3% of the Part-payment Amount|
|Andhra Bank||NIL||Part-payment Not Allowed|
|Bank of Baroda||0% to 4% of the Principal Outstanding Amount||0% to 4% of the Part-payment Amount|
|Federal Bank||2% of the Principal Outstanding Amount||Part-payment Not Allowed|
|RBL Bank||0% to 3% of the Principal Outstanding Amount||Part-payment Not Allowed|
|Fullerton India Finance||0% to 7% of the Principal Outstanding Amount||0% to 7% of the Part-payment Amount|
|Tata Capital||2% to 4% of the Principal Outstanding Amount||0% to 2% of the Part-payment Amount|
|Bank of India||NIL||NIL|
|Corporation Bank||NIL||Part-payment Not Allowed|
The table clearly indicates that there are many lenders who do not impose any kind of prepayment charges at all. Also, a borrower must keep looking for pre-closure offers as banks provide certain seasonal offers, every now and then, when banks completely waive off the pre-closure charges for a certain period of time.
Benefits of Pre-closing a Personal Loan
The preclosure of a personal loan comes with many benefits attached to it. These are:
Leads to Savings
Prepayment of the pending principal loan amount helps you save on the interest payment. The tenure of a personal loan generally ranges between 3 to 5 years. The interest rates charged on personal loans are higher as compared to other loans. Pre-paying a personal loan helps to cut interest payments since the interest will be charged only till the time when the complete repayment is made.
Relieves Debt Burden
Paying monthly EMIs on time is a big tension and often eats up a major portion of your monthly salary. Pre-closing a personal loan releases the debt stress from your income and brings you peace of mind.
Disadvantages of Pre-closure of a Personal Loan
The preclosure of a personal loan can also bring your way certain adversaries. These are:
In order to cover the loss of interest payments, the banks impose a pre-closure penalty that can be as high as 7% of the outstanding principal amount. This amounts to a huge loss of funds. Therefore, the interest savings on pre-closure is often regarded as a myth by many financial experts.
Loss of Investment Opportunity
There is an estimated loss of investment opportunity as if not used for pre-closure, you could have used the underlying funds for making some kind of investment that could have generated profits for you. But since, now, the funds are being paid towards loan pre-closure, you lose the opportunity.
Process for Pre-closure of a Personal Loan
Pre-closure of a personal loan is as simple as applying for one. It is to be, however, kept in mind that the loan cannot be closed online and you would need to physically visit the bank branch in order to close your loan. The following are the major steps that you need to follow in order to successfully pre-close your personal loan:
Step 1: Check if you are eligible for the pre-closure process.
Go through your loan statement and check the terms and conditions attached to the pre-closure of a personal loan. Check the lock-in period and the minimum number of EMI payments which should have been made in order to close the loan. Make sure that you have completed the lock-in period and have made the minimum number of EMI payments.
Step 2: Contact the bank and inquire about the process and documents for personal loan pre-closure.
You can either call the bank or visit the bank branch and inquire about various details of personal loan pre-closure. Ask them about the documents that you would require to carry in order to successfully close your loan and note them down. Also, inquire about the total amount that you will need to pay for pre-closure which includes the principal amount and the pre-closure charges.
Step 3: Prepare all the required documents.
Prepare all the documents as stated by the bank and as is listed in your loan statement. These include:
- Personal Loan account number: This number is clearly mentioned on your personal loan statement. Note it down.
- Identity Proof: You will need to carry a government authorised identification proof such as a passport, Aadhar card, driving license or PAN card.
- Cheque or Demand Draft: Carry a cheque or demand draft for the total payable amount, signed towards your personal loan account.
- Other Documents: Also carry all other loan-related documents which include the loan statement, approval letter any other document issued at the time of sanctioning of the loan.
Step 4: Visit the bank and move to the loan section.
Visit the respective bank branch along with all the required documents. Once you reach the bank, go to the loan section of the bank. Contact a bank executive there and request for the pre-closure form. Also, inquire about any additional formalities that you are not aware of.
Step-5: Fill the pre-closure form
Fill in all the details on your personal loan pre-closure form. Make sure you correctly fill the form and cross-check all the details. Sign the form after ensuring that it has been filled correctly.
Step 6: Submit the form along with other documents.
Submit the pre-closure form along with all other documents mentioned under step 3.
Step 7: Make payment
After you have submitted all the required documents, pay the entire loan amount along with pre-closure charges. You can either pay in cash, through cheque or a demand draft.
Step 8: Collect acknowledgment slip
The bank will issue an acknowledgment slip in favour of your loan pre-closure. The final authorisation letter will be sent to you through mail once personal loan account is permanently closed by the bank, which generally takes a few days.
If you have the availability of funds and your personal loan tenure is far from completion, opting for personal loan pre-closure is a good idea as it can help you save on the amount of interest payable. However, before choosing to avail the facility, you must go through the underlying terms and conditions for the pre-closure process. Also, the bank will impose a pre-closure charge for letting you pay-off your loan before the repayment schedule. If the pre-closure penalty amount is less than the interest payable, only then opt for the facility.