Business News Desk: In today’s time, banks offer many types of loans to customers. This includes all the options from home loan, car loan to personal loan. People apply for these loans as per their need. By taking a loan, you can easily do your work, but the liability of repaying it increases. Their EMI has to be paid for many years. In such a situation, paying the installment every month starts becoming a headache.
However, if you want, you can get rid of the debt before time by prepayment of the loan. Banks generally do not charge penalty for home loan prepayment etc. or charge it in some special circumstances. But if you have taken a personal loan, then prepayment penalty can be charged for premature settlement. In such a situation, you should do calculations before taking the decision of loan prepayment so that you know whether your decision is profitable or not.
First understand why banks charge loan prepayment penalty
The calculation of how much interest will be charged on the loan depends on the loan tenure of the borrower and the EMI is prepared accordingly. But if you choose the option of prepayment in the middle of the tenure, then the banks are not able to charge you the same interest as they could have charged in your entire tenure. If we talk about personal loan, it is an unsecured loan and its interest rates are quite high. In such a situation, if you end it before time then the bank incurs loss. They compensate for this loss through loan prepayment penalty. However, the amount of prepayment penalty is included in the conditions. Some lenders charge fixed penalty while some charge it on percentage basis. Therefore, whenever you take a loan, understand its conditions clearly.
To understand whether the decision of loan prepayment is beneficial for you or not, first check whether prepayment penalty is mentioned in the loan terms or not. If not then you can easily take this decision. If prepayment penalty is being charged on the loan then you should do a calculation. Only after this, reach any conclusion. First see how much penalty will be charged for repaying the loan early. After this, calculate the total interest to be paid on your remaining loan. After this subtract the penalty from the interest. After this, decide according to the answer you get. If you are saving a good amount in interest even after paying penalty, then you can decide on loan prepayment. If the situation is the same, then you will get only one benefit of loan prepayment, that is, you will get freedom from EMI. Take a decision after looking at your situation. Whereas if you feel that the answer is negative, then you will incur loss due to prepayment, in such a case it would be wise to repay the loan in its entire tenure.