While closing a personal loan before time allows you to be debt-free, it also attracts a penalty. Know the pros and cons before making such a move.
The personal loan space has witnessed a tectonic shift of late due to digital disruption and evolution of non-banking finance companies (NBFCs). Being an unsecured mode of finance, interest rate on personal loans are slightly higher, resulting in high EMIs. Because of this, certain borrowers look to close the loan before its tenor and be debt-free. In this article, we’ll highlight the pros and cons of such a move.
- Save on interest
When you close a personal loan before its tenor, you save on the interest outgo. For example, if you’ve taken a personal loan of Rs.5 lakh at a 10% interest rate for a tenor of 24 months, your EMIs come to Rs.23,072 per month with total interest payable amounting to Rs.53,742. Now after paying 5 EMIs, if you close the loan on the 10th month, you save Rs. 22,025 on interest.
You can use several online personal loan EMI calculators and foreclosure calculators to know the EMIs payable and savings on interest.
- Be debt-free
Closing the loan before its tenor allows you to be debt-free. Mentally satisfying, it allows you to be in control of your finances. It also allows you to focus better on key financial goals.
- Increases disposable income
Closing a personal loan before time increases your disposable income. The part of income that went into paying EMIs remains with you. You can direct this amount into investments earning higher returns for wealth creation. For instance, you can use this amount for SIPs in equity mutual funds to earn inflation-adjusted returns.
- Foreclosure charges
Closing a personal loan before time attracts a penalty. Since lenders miss out on the interest income, they levy a foreclosure charge to make up for the loss. While making a personal loan application, it’s essential to read the fine print to know the foreclosure charges associated with the loan. Today, most lenders spell out these charges on their websites.
Make sure you have thorough knowledge of them before making any such move. Ideally, these charges aren’t worth paying if you are in the later stages of your loan.
- Can impact CIBIL score
Closing a loan before time can impact your CIBIL score. Note that when you keep a loan active, it shows you can manage your finances and debt. However, closing it before time may raise questions about your creditworthiness and your money management skills, thereby lowering your CIBIL score. A low score may hurt chances of availing secured big-ticket loans in the future.
Hence, instead of closing the loan at once, make sure you pre-pay a certain sum every year to bring down the loan tenor.
Everybody wants to be debt-free from a loan as soon as possible. However, it’s essential to do a cost-benefit analysis before making any such move as it may have repercussions in the long term. Today, low-interest rate personal loans are available that keeps your EMIs within budget.