Personal Loan

Prepayment Of Personal Loan: Features, Benefits And Charges


Personal loans are great financial tools for many people. Several financial institutions in the country offer them. Contrary to popular belief, personal loans aren’t just for emergencies. You can use them to fulfil any personal objective — from home renovation to a wedding or even a vacation. 

While a personal loan can be used for multiple purposes, most people use them to meet short-term financial needs. These loans are typically unsecured. In other words, borrowers don’t have to provide collateral to secure them. They are easy to get if you have a good credit score

Benefits of Prepaying a Personal Loan

  • Get Rid of the Loan Burden Faster

Using a personal loan to raise funds is a great option if you need extra cash. But, with time, you also need to repay them with interest. These monthly payments are called EMIs (Equated Monthly Instalments). Since these loans are unsecured, the interest rate is higher than a secured loan. The pressure of monthly EMIs can take a toll on your financial health. It all depends on the loan tenure and the state of your finances.

Personal loan prepayment is a great way to pay off your loan early. If you have some extra money, use it to pay off your debt. Remember, the longer the loan tenure, the bigger the sum you are expected to repay.

However, loan prepayment attracts some fines. In the case of a personal loan, this prepayment fee is nominal.

  • Improves Your Credit Score

It’s important to know that credit score is a critical part of your financial life. It can make or break your ability to borrow money. 

If you have taken a loan, you can prepay some of it and improve your credit score. Prepaying your loan is an important part of debt management. It is also the first step toward improving your credit score.

The majority of loans are approved based on your credit score. If you have outstanding loans, they will affect your credit score negatively. But if you pay them off fully or partially, your credit score will also go up. This means that you will qualify for a better deal on loans in future.

Types of Prepayment for Personal Loans

Full Prepayment

Personal loans have a one-year lock-in period, after which you may prepay the balance to save on interest. However, prepayment incurs a penalty. Most lenders charge up to 5% of the outstanding amount.

Part Prepayment

Part prepayments might lower your loan burden if you don’t want to engage in the monthly EMI cycle for long. Partial prepayment is beneficial as it reduces the EMI burden significantly. However, some lenders may restrict you from part prepayments until the repayment of a predetermined number of EMIs.

Charges on the Prepayment of Personal Loans

Financial institutions typically earn from the interest charged on loans for the entire loan tenure. Prepayment reduces the bank’s interest rate over additional time. Some financial institutions demand prepayment fees to offset lost revenue.

Different financial institutions charge different prepayment fees. Depending on the bank, prepayment charges are between 4% and 5% on the outstanding loan amount. Prepayment costs also vary based on the loan term. Some banks charge zero prepayment costs after three years; others may lower the interest rates.

Features of Prepayment of a Personal Loan

The features associated with the prepayment of loans differ from one financial institution to the other. Let’s look at some of these features:

  • Some banks offer pre-closure of the loan but have prepayment charges.
  • The pre-closure period is as per the bank’s terms and conditions. There are different pre-closure charges for different types of loans. 
  • The maximum prepayment amount can go up to 25% of the principal amount due. But that’s not all! You can prepay your loan twice during the loan term. 
  • A good thing about loan prepayment in some institutions is that you can prepay your loan without any prepayment penalty. You can prepay up to 5% of the outstanding amount each year for a maximum of 10 years.

Should You Prepay Your Loan?

It’s always affordable to prepay the loan amount. For instance, if a borrower gets a loan at an interest rate of 15%, the annual savings will not exceed 9% to 10%.

The consumer may save an additional 5% to 6% on annual interest by prepaying their loan in full at any time before the due date.


Prepayment of personal loans has resulted in reduced stress for monthly EMIs. 

By prepaying the loans, you can rid yourself of unnecessary headaches and plan your financial future efficiently. A minimum fee is required for the loan prepayment and every bank has a different rate. It’s important to understand the benefits and features offered by your chosen lender. 

You can find similar blogs on personal loans on Piramal Finance. Further, we also offer a wide range of products and services to help you get the best deal out of your investments.