What is a Prepayment Penalty

Personal loans can be a great help when you've run out of other money options. You can use a personal loan to pay for sudden expenses, then pay back the loan early when you get extra money. But lenders charge you a penalty fee when you pay early. 

✅ Want to see if you already have a loan offer waiting? You can check your pre-approved loan offer in just 2 steps. It's smart to read all the fees before you take any loan.

Let's talk about what this penalty is and why banks ask for it when you want to pay your loan early.

A prepayment penalty is money you pay to the lender to you clear part of your personal loan before time. Let's say you took a loan and paid your monthly amount (EMI) for 12 months. Now you want to pay off some of the loan early. The bank will ask you to pay extra money as a fee.

Usually, lenders start this fee after a certain time period they decide. The part-prepayment fee varies across different lenders. Bajaj Finance charges 4.72% (inclusive of applicable taxes) of the principal amount of Loan prepaid on the date of such part Pre-Payment.

Lenders also charge foreclosure charges if you pay off your entire loan at once.

You save on interest money

The biggest benefit is you pay less interest. Personal loans have fixed rates, which means the longer you take to pay, the more extra money you give to the lender. When you pay early, you cut down this extra cost.

Why this helps: If you have a long loan period, interest keeps adding up. Paying early stops this and saves you money.

You finish your loan faster

When you pay extra money towards your loan, you can finish it quicker than planned. Instead of sticking to your original plan, putting in extra money speeds things up. You become debt-free sooner.

Smart tip: Once you're free from loan payments, you can use that monthly money for savings or other things you want to buy.

Timely payment helps improve your credit score

Timely repayment makes your credit score go up, which is like a report card for how well you handle loans. A better score helps you get future loans at better rates. With a good score, lenders trust you more and give you better deals. You can check your personal loan eligibility in 2 steps to see what better rates you might get with an improved credit score.

You get more financial freedom

When you pay off your loan early, you don't have to pay that monthly EMI anymore. This gives you extra money every month for emergencies, investments, or things you enjoy.
 

Having this extra money feels good and gives you more control over your finances.

Think about penalty costs

While paying early has benefits, remember that some banks charge penalty fees. You need to check if the money you save on interest is more than the penalty you'll pay.

Lenders give you a loan for a fixed time and expect to earn a certain amount of interest from you. When you pay early, they earn less money than they planned. To make up for this lost income, lenders charge a penalty fee.

Here's what happens: When you pay extra money, it goes towards reducing your main loan amount. With a smaller loan amount, your monthly payments become lower. You can also choose to keep the same monthly payment but finish the loan faster.

Read more about personal loan interest rate before applying for the loan.