Loan prepayment — the act of repaying your loan before its scheduled tenure — sounds like a financially smart move. After all, the sooner you close your debt, the sooner you can breathe easy. But is it always the right choice? At Vizzve Finance, we believe in making informed financial decisions, and that means looking beyond the surface.
Let’s break down the advantages, disadvantages, and hidden costs of loan prepayment so you can decide what’s best for you.
1. What is Loan Prepayment?
Loan prepayment happens when you pay off part or all of your outstanding loan amount before the due tenure. It can be full prepayment (closing the loan entirely) or partial prepayment (paying a lump sum to reduce the outstanding balance).
2. Pros of Loan Prepayment
✅ Interest Savings – The earlier you prepay, the more you save on total interest.
✅ Debt-Free Lifestyle – Closing a loan early gives you mental peace and improves cash flow.
✅ Credit Score Boost – Reducing your debt-to-income ratio can positively impact your credit score.
✅ Increased Loan Eligibility – With fewer liabilities, you may qualify for bigger or better loans in the future.
3. Cons of Loan Prepayment
⚠ Prepayment Penalties – Many banks and NBFCs charge a fee (1–4% of the outstanding amount) for early closure.
⚠ Opportunity Cost – Using lump sum funds for prepayment might mean missing out on higher investment returns.
⚠ Loss of Tax Benefits – For home loans, prepaying early can reduce your annual tax deductions under Sections 24(b) and 80C.
4. Hidden Charges You Must Watch Out For
Processing/Administrative Fees – Some lenders add a service charge for handling prepayment requests.
GST on Prepayment Penalties – The penalty may be taxed, increasing your cost.
Interest Calculation Method – Ensure the lender adjusts your EMI tenure rather than reducing EMI amount (for better savings).
5. When Should You Prepay Your Loan?
💡 Best Time: Early in the loan tenure when interest forms the bulk of EMI payments.
💡 Worst Time: Towards the end of the loan, when most interest is already paid.
Vizzve Finance Tip:
Always ask your lender for a No Due Certificate (NDC) after prepayment to avoid future disputes.
FAQs
Q1: Is it good to prepay a loan early?
A: Yes, if you have surplus funds and the prepayment penalties are low, it can save you significant interest.
Q2: Can loan prepayment hurt my credit score?
A: No, it generally improves your score, but closing old accounts may slightly reduce your credit history length.
Q3: Do all lenders charge prepayment penalties?
A: No, RBI rules prohibit penalties for floating-rate home loans, but fixed-rate and personal loans may still have charges.
Published on : 10th August
Published by : SMITA
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