Whenever there is a sudden need for money, many people choose personal loans to fulfill their financial needs. Personal loans are easier to get compared to other unsecured loans. After taking the loan, when the person has enough funds, they may choose to make a prepayment.
If you are also planning to make a prepayment on your loan, it’s important to know that you may have to pay some charges. In this article, we will cover everything you need to know about this matter.
What Are Prepayment Charges on a Loan?
When a person repays a loan before the end of the loan term, it’s called prepayment. Financial institutions often impose a penalty for this, known as the prepayment charge. This penalty applies when paying off either part or the entire loan.
Why Are Prepayment Charges Imposed?
Financial institutions charge prepayment fees to recover the interest they would have earned during the loan term. The charge helps cover the loss of income due to early loan repayment.
How Much is the Prepayment Penalty?
Typically, the prepayment penalty ranges from 1% to 5% of the outstanding loan amount. However, different financial institutions may have different rules for this charge.
Get Information on Prepayment Charges Beforehand
When applying for a personal loan, it’s important to understand the terms and conditions of the prepayment fee. This ensures that you are aware of the charges if you decide to prepay the loan in the future.
Benefits of Prepaying a Personal Loan
Prepaying a personal loan can be a strategic move for borrowers. It reduces the financial burden and can also help improve your credit score.
RBI’s Consideration to Eliminate Prepayment Charges
The RBI is considering removing prepayment and closure fees on floating-rate loans for MSME borrowers. This move aims to provide relief to lenders. The RBI has sought feedback on this proposal from stakeholders, with a deadline of March 21, 2025.