Personal Loan

Important Things to Know before Pre-Closing a Personal Loan


For most people, a personal loan is the best way to get the money they need quickly. While this specialized credit is easily accessible to everyone with no paperwork, it typically comes with a high-interest rate.

The high-interest rate might increase your total debt and drain your available credit. Paying off debt quickly is very helpful since it reduces the interest you have to pay, as any financial adviser or even a careful friend would tell you. 

This is especially true if the loan is a high-interest personal loan (interest rates typically range from 11–22% per year; borrowers with poor credit may pay as much as 26%).

A personal loan in the form of Equated Monthly Installments (EMIs) may have a longer repayment term of up to 5 years, sometimes even 7 years. However, paying off your mortgage early can greatly improve your credit score.

Before you jump on the pre-closing bandwagon, however, it’s vital to understand the pros and cons of pre-closing a personal loan, as with any financial decision.

Important Things to Know before Pre-Closing a Personal Loan

Prepayment of a personal loan might reduce interest costs

It is possible to reduce the total interest you owe the lender by paying off the loan before it matures.

You get quicker and easier credit when you pre-close on a personal loan

Borrowers seeking a Home Loan or other form of long-term finance should have a spotless credit history and low or no outstanding debt. Doing this can increase your borrowing capacity and secure low-interest rates on your new loan.

By eliminating this debt, you’ll gain financial independence and the psychological benefits of a debt-free state of mind. Not to mention, it will increase morale!

Your financial resources may run out if you pre-close on a personal loan

You can pre-close your loan by paying the whole balance in one lump sum. Due to the huge total, you may have to pool your resources and spend your savings to pay for it. You could put the same money to better use in other, more productive ways. You should reconsider pre-closing the personal loan if you anticipate a bigger return on your investments than the interest you’ll save.

However, you could put the same sum of money toward other goals, such as paying for a child’s college tuition or covering the costs of a family wedding.

There may be fees for prepaying a personal loan

Some lending institutions charge a prepayment penalty for paying off a personal loan, which can be up to 5 per cent of the principal money. This is because these lenders want to keep collecting money from your pocket so that you cannot get out of debt. Choose a loan provider that does not charge this unnecessary penalty.

When Is the Right Time to Pre-Close a Personal Loan?

Loan pre-payment terms are highly situational and vary greatly from borrower to borrower. This allows you to pick the period that works best for your budget. Why not pre-close the loan and eliminate the debt if you have enough money saved, got a rise, or received an unexpected bonus?

How to Pre-Close Your Personal Loan?

The term “pre-closure” means the full repayment of a loan before finishing the loan term. Some loan providers charge a fee if you want to close the loan early. Pre-closing can reduce your interest rate and overall loan load. You can get your personal loan closed early by following the steps below.

It’s vital to find the potential savings before the pre-closing penalty and determine if proceeding with the process of pre-closing the personal loan is worth it. However, there is a general advantage to deciding to pre-close on a loan as early in the loan’s term as possible. 

The pre-closure fines, however, are the harshest during this time. The pre-closing policies and associated fees of various financial institutions vary widely. 

  • To settle your loan, you must go in person to the bank from whom you have taken the money.
  • You’ll need to bring your valid photo identification, recent bank statements showing that your EMI was successfully withdrawn, your loan account number, and a check or money order to pay back the total loan balance.
  • Lenders also assess prepayment penalties as a percentage of the loan balance, which you must pay in addition to the principal.
  • If you pay your down payment in advance by check, cash, or DD, the bank will issue you a receipt that must be preserved for record-keeping purposes.
  • A few days after the loan closes, the bank will send you the loan agreement if everything goes smoothly.

What Is Part Prepayment of the Loan?

Sometimes, you may receive a bonus or come across some unexpected money you’d like to use to pay down your loan. It’s possible that the sum won’t cover the entire loan. When this occurs, you can prepay a portion of the debt.

Prepayment penalties will apply if only a portion of the debt is paid off early. Pay close attention to those. In addition, lenders may limit the total number of partial prepayments permitted. 

Verifying with your lender before making a prepayment is vital because these requirements may differ.

Your loan account will not be terminated as a result of this. After making a partial prepayment on the loan, you may still have a few more due EMIs.


In the case of personal loans, the borrower typically has no collateral to be released upon loan repayment.

You mustn’t put off closing your personal loan. Instead, you should know how to close your loan properly for your credit’s sake.

Need instant funds? Apply for a personal loan with Piramal Finance!