When do you take a personal loan? Normally, when you have a sudden expense that you cannot set foot in your current salary, a personal loan comes in handy. This could be a sudden medical expense, a higher education payment, a fancy gadget you set your eyes on or an exotic holiday that you have been planning for a long time. You may not have the cash upfront but you could easily pay it off in equal installments over a period of time. Thus, you choose a personal loan to meet your cash requirements. However, there are certain times you may be fueled with liquidity over the months and would desire to pay off the remaining loan at once. Let’s take a look at how this would go!
How does a Personal Loan work?
A personal loan is a collateral free unsecured loan that can be taken for any purpose. Any Indian citizen or resident over the age of twenty one years and earning a monthly income of over Rs 30,000 is eligible to apply for this loan.
All you need to do is to fill up an online application on the LoanTap website and upload the following documents-
- PAN card
- Proof of Residence(Aadhaar Card/ Driving Licence/Passport)
- Salary slips of last three months
- Bank Statement of Salary account for the last six months
The LoanTap team will evaluate the application based on the documents provided. If the credit score is good and you have a steady job, there is a high chance that your loan will be approved in no time. The entire process is completed within 24-36 hours and the loan is credited to your account.
What do you mean by prepayment of Personal Loan?
Prepayment of personal loan means paying back a part or whole of the principal amount before the end of the stipulated tenure. Full prepayment is also called a foreclosure of the loan.
Does prepayment involve penal charges?
When a lender provides you with a personal loan, it is expected that you will repay it over the prescribed tenure. Normally loans come with a specific clause in the agreement that they need to be serviced for a minimum of six months before you can make a prepayment without penalty. If it is repaid within the minimum period, it will incur penal charges that vary from lender to lender. This is usually specified in the Personal Loan Agreement.
Paying off the loan early and becoming debt free is a personal choice of an individual. In case someone wishes to prepay before six months there is no bar. However , a penalty is levied in case the loan is prepaid in part or full before the six month period is complete.
After you have serviced your loan regularly for six months , you have the option to make a part or full repayment of the loan free of charge.
What are the benefits of prepayment?
When you take a loan you promise to repay it over a fixed tenure at an EMI that is convenient to you. Every loan comes at an interest. At LoanTap, personal loans demand an interest rate of 18%. If you come into extra cash by way of a bonus or a salary increment or any other reason, you can definitely think of reducing your loan outstanding by paying off the loan in part or in full. This will help you save considerable interest. It would make you debt free which is great. However, it would also reduce your liquidity by removing the extra cash at your disposal.
Very early prepayment incurs penal charges and the benefit should be evaluated accordingly. Not adhering to the terms of the signed contract may not look great on your credit score unless you close the entire loan. Fresh lenders will note the point that you do not service the loan till the end of the tenure and may be hesitant to grant you a fresh loan.If you are prepaying a loan only because you are switching to a new one, the credit score doesn’t get a boost.
How does it improve creditworthiness?
Prepayment of the entire loan helps boost the credit score. It keeps your line of credit open in future. It indicates good financial health and an intent to repay loans before time that can stand you in good stead when you apply for your next loan.
Remember that you can pay the loan over the prescribed loan tenure without affecting your credit score. The only circumstances under which you should opt for pre-payment is when penal charges are no longer leviable, that is after you complete six months.
You should always take into consideration your cash position before you undertake the option to prepay your loan ahead of time. If you can put the loan to good use, there is no rush to prepay because you would be compromising on liquidity.
The decision to prepay should be taken only when you have extra cash at hand which you can safely deploy to repay the loan and reduce the interest liability.
Related articles – Personal Loan Prepayment: The Basics and the Benefits