When you require some additional cash to meet expenses for buying a property, for marriage, buying a vehicle, for a vacation or an unexpected medical emergency you can think of applying for a personal loan through a bank or financial institution. Banks and NBFCs provide different kinds of loans including personal loans and loan against gold to meet immediate cash requirements. Gold loan interest rates are lesser since it is taken against collateral security. However, you get only up to 75%-85% of the total value of the gold you’ve given as security to the bank.
A personal loan is a short term loan. Unlike a gold loan, these loans are provided to individuals taking into consideration their credit score and ability to pay off the loan. A high credit score and a good monthly income increase your chance to get the maximum loan amount possible at a minimum rate of interest. The paperwork and documentation required for this loan is minimum.
A personal loan has to be paid off within a set period through fixed installments. These installments referred to as EMI’s includes the principal amount as well as the interest charges. If you have an option you can choose to pay off the entire loan amount or a part of it before the end of the set period.
What Do You Mean By Pre-Payment Of A Loan?
When you choose to repay the entire loan amount or a part of it before the end of a specific loan tenure it is referred to as a pre-payment of a loan. Banks and NBFCs cannot stop a person from prepaying the loan amount. However, certain NBFCs and banks charge an amount as the penalty in such a situation.
Partial Payment Of A Loan
You can think of partial payment of a loan if you have some additional cash with you. Even though the amount is not sufficient enough to pay off the entire outstanding loan amount a good portion of it can be covered making it easier to pay it off quickly.
Keep in mind that the NBFCs and banks generate profit through the interest rates that are charged on personal loans. Interest rates are higher when the tenure is long. This means more profit.
When you choose to pay off the loan amount partly or completely beforehand it affects the profit rate. Hence, most of the NBFCs and banks charge a percentage of the principal amount or the amount prepaid as a penalty. The amount varies from bank to bank based on their policies.
The penalty charges on personal loans can be anywhere between 2%-5% of the principal amount on an average.
Benefits Of Prepayment/Partial Payment Of Personal Loans
The following are some of the biggest advantages of paying off a personal loan in advance.
- Reduced rate of EMI
- Pre-payment charges if any is much lesser than the interest rates you’ll be paying during the loan tenure.
- Loan tenure is reduced
- Credit score increases which in turn increases your creditworthiness.
- Increases your chance of getting loans at a better interest rate in the future.
The pre-closure charges of the different banks and NBFCs vary based on their specific policies. To avoid paying a big amount as pre-payment charges you need to be well aware of their terms and conditions in advance. Make a comparison between specific policies of the major banks and NBFCs before applying for a personal loan.
This blog is maintained by the Finaura team. Finaura is a solution that will help you find the best gold loan solution from gold loan company nearest to you. If you have any queries please feel free to contact us. Call us on +91 484 2388285 or email us at [email protected]