Q: I had taken a personal loan a few months back and now I’m thinking of pre-closing it. What, according to you, should be my main considerations at this point? – Nakul
A: Many among us take a personal loan to meet an urgent requirement, but after a few months, when the finances stabilise, we don’t want to bear the loan burden till the end of the loan tenure. Hence, we look for options like prepayments and pre-closure. While these steps definitely accelerate the journey to achieve freedom from debt, there are still a few important things that must be factored in before making a decision.
Pre-closing Charges: Bear in mind that most banks levy an additional pre-closure charge that can range anywhere between 1-5% of the principal outstanding, plus GST.
Pre-closure Timing: Different lenders have different time requirements in place that need to be met to pre-close a personal loan. For example, some banks allow pre-closure only after 12 loan EMIs have been paid while others let their customers pre-close the loan after just 1 EMI has been paid. Also, many lenders have different rates in terms of pre-closing charges depending on the timing of pre-closure – they’ll generally charge a steeper rate if the loan is closed soon after disbursal and a lower rate if it’s closed near the end of the loan tenure.
No Refund On Loan Processing fees: Yes, the processing fees (generally 1-2% of the principal amount) won’t be returned if you pre-close a personal loan.
Liquidity: It will be safe to assume that you have funds in place to pre-close your personal loan. However, breaking your emergency fund or exhausting your core savings to pre-close your loan may not be a good idea. Doing so will leave you defenceless if you were to encounter a financial emergency – something that may force you to take a personal loan again. So, have a clear financial plan in place and do not destabilise your financial foundation in a rush to clear off your debt.
Have a question on personal finance? Ping me on Twitter at @adhilshetty with the hashtag #AskAdhil. The writer is CEO, BankBazaar.com, an online marketplace for loans and credit cards.