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What is Prepayment Penalty on Personal Loan?

A personal loan offers a plethora of benefits such as zero end-use restrictions, quick loan processing, substantial loan amount and no requirement for collateral. However, due to the absence of security, a comparatively higher interest rate is charged on this advance. Therefore, to reduce the interest burden, borrowers often opt for part-prepayment or full prepayment before the tenor ends.

Sometimes, part-prepayment charges may also be applicable while opting for advance payments. Know what a prepayment penalty is and why lenders charge it when borrowers opt for this facility.
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What is Prepayment Penalty?

A prepayment penalty can be understood better with an example.

An individual is servicing a personal loan for the last one year, while the actual tenor is three years. Now, if he decides to partly or fully pay off his outstanding balance, he will need to pay a certain percentage as a penalty, depending on the loan type and size. Usually, the prepayment penalty on a personal loan starts after a certain lock-in period of 6 months or 1 year. Moreover, if the part-prepayment is more than 25% of the total outstanding balance, lenders may levy a fee of 2.5% or more plus GST.

However, the charges depend on a lender and the loan principal. Nevertheless, often additional foreclosure charges are imposed when opting to prepay the entire outstanding amount and foreclose the loan account. Hence, it is vital to know about all adjacent charges before opting for any such facility.

Why do Lenders Levy Prepayment Charges?

Every loan product comes with a specific tenor and the lenders expect a certain interest income from that product over time. Therefore, when an individual chooses to repay the loan faster, lenders eventually earn a lower interest amount. So, they can charge a penalty for paying a loan early to discourage borrowers from paying off the outstanding loan faster.

However, Bajaj Finserv does not levy any part-prepayment or foreclosure charges on a personal loan. It means individuals can avail of a personal loan and make the prepayment as per their convenience without paying any additional charges.

Besides knowing that what is prepayment penalty, take a look at the benefits of part-prepayment in detail.

What are the Benefits of Personal Loan Prepayment?

Although individuals have to bear an early repayment penalty in some cases, this facility proffers a host of benefits. For example, the interest burden is reduced in the following ways -

  • Opt for reduced EMI payment
  • Trim the tenor

Note that the prepaid amount goes towards paying off the principal amount only. However, with reduced principal, a borrower qualifies for affordable EMIs and lower borrowing costs. Alternatively, if an individual wishes to reduce the interest payable, he can prepay to shorten the tenor, keeping the EMIs intact.

In either case, use a personal loan part-prepayment calculator to check which option is feasible before making a prepayment. Additionally, read the fine print or loan agreement paper before applying for the loan. Usually, details about additional charges are mentioned in these documents.

Knowing what prepayment penalty is makes it easier to decide when to opt for this facility. Eliminate the need to pay heavy charges by choosing a personal loan from Bajaj Finserv.