Personal loans are an accessible form of credit that don’t require collateral, meaning you don’t have to provide assets as security to qualify. This advantage makes personal loans a popular choice for those who need quick financing. However, their unsecured nature often leads to higher interest rates compared to secured loans like home or car loans. This convenience comes with a trade-off: while personal loans are easy to obtain, they can also be more expensive in the long run due to elevated interest rates.

When it comes to closing a personal loan, borrowers have two main options: full repayment (by paying all scheduled EMIs) or prepayment (by paying off the loan earlier than planned). Here’s an in-depth look at these options to help you decide the best way to manage your personal loan.

1. Full Repayment
In the full repayment method, you pay your scheduled Equated Monthly Installments (EMIs) on time throughout the loan’s term. When the final EMI is paid, the loan is automatically considered closed. Here’s how it works:

Regular EMI Payments: You make all required payments, each of which includes a portion of both the principal and interest.
End of Loan Term: Once the final EMI payment is made, your loan is closed with no additional balance owed.
No Additional Fees: Since you’re paying as per the original schedule, there are no extra fees or penalties involved in full repayment.

2. Prepayment Options: Full Prepayment and Part Prepayment
If you wish to pay off your loan ahead of time, prepayment options come into play. Here’s a breakdown of full prepayment and part prepayment to understand how each works and the potential benefits and drawbacks of each option.

  a) Full Prepayment
In a full prepayment, you pay off the entire remaining balance of your loan before the end of the loan term. While this can help you save on future interest payments, there are a few key considerations:

Pre-Closure Charges: Many lenders apply pre-closure charges for early loan closures. This fee is generally calculated as a percentage of the outstanding principal and is intended to offset the interest the lender would lose by closing the loan early.
Savings on Interest: By paying off the loan before its scheduled end, you can reduce the amount of interest you would have otherwise paid. This is particularly beneficial if your loan has a long tenure and high-interest rates.

Operational Costs: Pre-closure charges may also account for the administrative costs lenders incur when processing early repayments. Some lenders impose these charges to discourage frequent early loan closures.

Key Takeaway: Full prepayment can be a cost-saving approach, but make sure to calculate the potential savings in interest against any pre-closure charges.

b) Part Prepayment
Unlike full prepayment, part prepayment involves paying a portion of the outstanding principal without closing the loan entirely. Here’s how part prepayment works and the benefits it offers:

Interest Savings: By reducing the principal amount through part prepayment, you will ultimately pay less interest over the remaining loan period. This can be especially beneficial if the interest rate on your loan is high.

Tenure Reduction Option: Some lenders allow borrowers to reduce the loan term instead of adjusting the EMI after a part prepayment. By shortening the loan tenure, you save on future interest costs, though your EMI may stay the same.
Flexible Repayment: Part prepayment provides flexibility, allowing you to reduce your loan balance in manageable amounts without fully closing the loan.

Key Takeaway: Part prepayment is a great option if you want to gradually reduce your loan balance and save on interest without fully settling the loan. It also offers the flexibility of maintaining the loan tenure or reducing it, depending on what your lender permits.

Important Considerations Before Pre-Closing a Personal Loan

Check Pre-Closure Terms: Always review your loan agreement for any pre-closure terms or penalties before making a prepayment. Understanding the fees involved can help you decide if prepayment is financially advantageous.

Compare Interest Savings and Charges: Calculate how much you stand to save in interest versus the potential pre-closure charges to ensure prepayment is cost-effective.

Lender Policies on Prepayments: Each lender may have different terms for full and part prepayments. Some may have a minimum waiting period before allowing prepayments, or they may only permit a specific number of prepayments during the loan tenure.

Impact on Credit Score: Closing a loan early can positively impact your credit score as it demonstrates a strong repayment history. However, closing multiple loans frequently may have mixed impacts on your score, depending on your credit profile.

Pre-closing your personal loan can be a wise financial decision, but it’s important to evaluate the potential savings on interest against any pre-closure charges. Full repayment allows you to close your loan without additional fees if you stay on schedule, while prepayment options like full and part prepayment give you flexibility to pay off or reduce your loan balance early. Make sure to consult your lender's terms, calculate your savings, and choose the repayment option that aligns best with your financial goals.