Personal Loan: Pros and cons of early repayment of debt | Mint (2024)

• Early repayment fee: Review your loan agreement to identify any early repayment penalties. Certain lenders impose charges for settling the loan before the designated term concludes. Be aware that penalty amounts can differ, so include this consideration in your decision-making process.
• Advantages of settling the loan ahead of schedule: Despite potential prepayment penalties, there are benefits to paying off your loan early. You stand to save money on interest throughout the loan's duration. Additionally, early repayment showcases responsible credit management, potentially enhancing your credit score and reducing your credit utilisation ratio.

Pros of early repayment

The benefits of prepaying a loan include:

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• Interest savings: By eliminating future interest charges, you can significantly reduce the total interest paid.
• Enhanced credit score: Early repayment has the potential to positively influence your credit score.
• Faster debt-free status: Settling the loan ahead of schedule allows you to achieve your goal of becoming debt-free sooner.

Cons of early repayment

The drawbacks of loan prepayment include:

• Prepayment penalty: There's a possibility of incurring a fee for settling the loan ahead of schedule.
• Reduced credit history: Early repayment may lead to a shorter credit history, which could have a slight, short-term impact on your credit score. However, the positive effects of consistent on-time payments and lower credit utilisation typically outweigh this concern.

Prepayment of loans is generally permitted, but various lenders enforce different terms and conditions. To avoid surprises, scrutinise the loan agreement thoroughly. Examine your loan terms to grasp any prepayment penalties. Subsequently, assess the balance between potential savings and penalties by comparing the amount you would save on interest against any prepayment fees to determine if early repayment is financially viable. Take into account your financial goals, considering how early repayment might release funds for other objectives such as saving for a house or retirement.

Frequently Asked Questions (FAQs)

Q. What are the pros and cons of short personal loan tenures?

Opting for shorter tenures is ideal for smaller loan amounts and individuals with higher monthly incomes, enabling them to easily manage the EMI amount. This choice facilitates prompt repayment of the loan, preventing prolonged debt obligations. Nonetheless, it's worth noting that personal loans with shorter tenures often entail higher interest rates.

Q. What are the considerations influencing the choice of loan tenure?

When deciding on the appropriate loan duration for your personal loan, take into account the following factors:

• Monthly income: Your earnings determine whether you can opt for a shorter tenure with lower EMIs or require a longer tenure with higher EMIs.
• Existing debts: Consider your current debts to ensure you don't take on more than you can comfortably repay.
• Interest rate: The interest rate has a direct impact on the overall interest paid; longer tenures generally result in higher interest costs.
• Financial goals: Select a shorter tenure for expedited repayment or a longer tenure for potential long-term savings aligned with your financial objectives.
• Purpose of the loan: Tailor the tenure to match the nature of your financial needs—opt for shorter tenures for immediate requirements and longer tenures for extended goals.
• Age and credit history play crucial roles: Younger individuals may qualify for extended loan durations, while a positive credit score can result in a reduced interest rate.

Q. How do you decide the right personal loan tenure?

Choosing the appropriate duration for your personal loan is a pivotal decision that demands thoughtful evaluation. It hinges on factors such as your financial standing, loan amount, and ability to repay. Opting for a shorter tenure could be fitting if you possess a higher income and can handle larger EMIs, as it reduces interest expenses and facilitates swift loan settlement. Conversely, if you require an extended repayment period and have a smaller loan amount, a longer tenure with lower EMIs may be more suitable.

Q. Can you select any duration within the specified maximum and minimum loan limits?

Borrowers usually have the freedom to select a tenure that aligns with their financial situation within the defined maximum and minimum tenure limits. Opting for shorter tenures increases monthly EMIs but reduces the total interest paid, whereas longer tenures result in lower monthly EMIs but higher total interest costs.

Q. Is it possible to request a modified loan tenure after obtaining a personal loan?

Occasionally, lenders might permit you to request a change in loan tenure while the loan is active. This, however, is contingent on the lender's policies and may entail administrative fees or adjustments to the loan terms.

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