EMI burden and high interest costs associated with personal loans often lead many to prepay or foreclose their existing personal loans. While prepaying personal loans is usually beneficial in most cases, borrowers should still conduct a proper cost-benefit analysis of making personal loan prepayment for optimal decision-making.

Here is a list of pros and cons of prepaying personal loans to help you take an informed decision.

Pros of prepaying personal loans

-Saves on interest cost

The primary reason for opting for personal loan prepayment is to save on the high interest cost.  

However, many borrowers wrongly believe that only prepayment made in the early stages of the loan tenure can lead to interest cost savings and not in later stages of the loan tenure. The truth is that interest savings exist in the later years also. Take the help of the online HDFC personal loan EMI calculator to calculate the interest savings incurred through personal prepayment. However, ensure to factor in the prepayment fees and other additional costs, if any, and opt for the prepayment only if it results in net savings.

-Lowers EMI to income ratio

Lenders prefer to lend to those loan applicants whose total EMIs, including the existing loans and the new loans, are within 50-60% of their monthly income. Thus, if existing personal loan borrowers planning to avail of another loan exceed the said ratio, then they can boost their loan eligibility by prepaying their personal loan and thereby bringing down their monthly loan repayment obligation within 50-60% of their monthly income. You can check your emi to income ratio by using HDFC personal loan EMI calculator to assess EMI change on prepaying the loan partially. You can even enquire on HDFC personal Loan customer care number regarding any doubt about prepayment.

-Lowers ratio of unsecured loan in the credit mix

Credit mix refers to the ratio of one’s outstanding secured and unsecured loan facilities. Credit bureaus consider credit mix while calculating the credit score of an individual. As lenders usually prefer lending to those with a higher concentration of secured loans like home loan, car loan, and loan against property in their loan portfolios, credit bureaus too tend to assign a credit score to such borrowers higher. As personal loans are unsecured in nature, prepayment of personal loan will reduce the weightage of unsecured loans in your loan portfolio and can thereby positively impact your credit score. Don’t forget to use the facility of contacting HDFC personal Loan customer care number when in doubt about the impact of prepayment.

Cons of making personal loan prepayments

-Prepayment charges

RBI has barred lenders from charging prepayment fees on the prepayment of loans availed at floating interest rates. However, in the case of loans availed at fixed interest rates, lenders are free to levy prepayment fees on loan prepayment. Hence, most lenders charge prepayment fees of up to 5% of the principal outstanding on making prepayments. Moreover, many lenders also disallow part-prepayment before the repayment of a predetermined number of EMIs by the borrowers. You can ask for the prepayment charges by contacting HDFC personal Loan customer care number as well.

-Adverse impact on liquidity

The high interest rate burden of personal loans leads many borrowers to use their emergency funds or investments earmarked for crucial financial goals to prepay their personal loans. However, doing so may adversely impact your financial capacity to deal with financial emergencies or income loss due to job loss, disability, illness, etc. Dipping into the investments earmarked for crucial financial goals can force you to avail of loans at higher interest rates later on to meet those unavoidable financial goals. Hence, opt for prepayment of a personal loan only if you have adequate surpluses after factoring in your emergency funds and investments and monthly contributions set aside for your unavoidable financial goals.

Now that you are aware of prepayment aspects, its good to also know the prerequisites for submitting an application for a PL

In order to prevent one’s application for a personal loan from being denied, it is important not to overlook certain essential components of the loan. Be sure to check your credit score before applying for a personal loan because your credit score is one of the first filters that lenders consider when determining whether or not to approve your loan application. You should try to avoid inquiring about loans and sending applications directly to several lenders, as this type of inquiry is known as a “hard enquiry.” Hard enquiries are recorded in your credit report, which brings your credit score down. After considering your ability to make payments and taking into account the fact that lenders generally favour applicants with EMI to income ratio up to 40 percent or 50 percent (including the EMI of the proposed personal loan), you should select the loan tenure whose corresponding EMI maintains your ratio within this range. You can also call HDFC personal Loan customer care number to get help regarding such decisions.

Also, keep in mind that the interest rates, processing fees, loan amount, eligibility requirements, and other features of personal loans are all subject to significant variation based on the lender providing the loan and the applicant’s credit history. The presence of fintech companies offering personal loans for smaller loan amounts and shorter tenures has made it even more imperative for individuals seeking personal loans to choose the appropriate loan product and compare among a variety of prospective lenders before deciding on any particular one. In addition to banks and NBFCs, the presence of fintech companies offering personal loans has made it possible for individuals to borrow smaller amounts of money over shorter periods of time. Also, don’t forget to utilize useful tools like HDFC personal loan EMI calculator.

Last but not least, remember that personal loans can range from short-term to medium-term loans and are provided by lenders without any restrictions on how the money must be used in the end. The size of the loan typically falls anywhere between 50,000 and 25 lakhs, while some lenders can approve loans of up to 30–40 lakhs, besides providing HDFC personal loan EMI calculator tool as well.