Is pre-closing your personal loan a smart move? Benefits and drawbacks explained

Paying the full outstanding balance of a personal loan before the original loan time period is known as pre-closure. Those looking to improve their financial position and manage their personal loans more effectively will want to know the details surrounding pre-closure of a personal loan which is covered here.

Understanding personal loan pre-closure

Personal loans are flexible in their intended purpose, however interest charged over the course of the loan can be significant. Paying off the loan in full prior to the original loan term allows borrowers the opportunity to avoid future interest payments. Depending on the financial institution, a prepayment charge or fee may be assessed in order to pay off the loan early.

Benefits of pre-closing a personal loan

• Cutting back on interest: A borrower can help save a large amount of total interest costs by paying off their loan early.
• Improving credit: Paying off a loan before the loan cycle ends of a loan repayment term may have a positive effect on one’s credit score.

Potential drawbacks of pre-closing a personal loan

• Prepayment penalties: Some lenders have prepayment penalties to recover the interest they lose.
• Liquidity issues: Before prepaying it is important to ensure there are still adequate emergency funds available.

Pre-closure procedure

The following generally address the steps before pre-closure of a personal loan:

1. Review the loan terms: Review the terms of the loan to check the lock-in period of the loan, other charges, and the conditions of pre-closure.
2. Contact the lender: Contact your lender, and let them know you will be pre-closing the loan. It will help you know the outstanding balance of your loan and charge you.
3. Pay the required amount: Pre-closure, including any pre-closure fee or all of the interest due before your due date on any loan principal amount that is outstanding and principal.
4. Obtain documentation: After payment has been received, make sure you also have received the loan closure letter and NOC showing the loan is closed.

Is pre-closing the right choice for you?

Personal loan pre-closure is a decision that is dependent on the unique financial situation of the borrower. Here are some factors to think about:

• Financial situation: Always have enough money to repay the loan early and still have an emergency fund to maintain your financial well-being.
• Cost-benefit: Understand whether the penalties for pre-closing the loan outweigh the interest savings you will actually get.
• Future financial goals: Look that pre-closure of the loan fits within your overall financial responsibilities and goals.

In conclusion, a financial advisor can give advice that is tailored to you and can help you through the pre-closure of a loan and decide what is best for your financial situation. Always remember that personal loans carry higher interest rates and can lead you to enter into a debt trap.

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