Recent lending data shows a clear behavioural shift: many borrowers now prepay nearly 50% of their personal loan outstanding within just 18 months.
This trend marks a move toward smarter debt management in India’s rapidly evolving credit ecosystem.
Personal loans are among the costliest retail loans, so early repayment can save significant interest. But what has caused such a strong trend toward prepayment?
Here’s a detailed analysis.
1. High Interest Rates Make Borrowers Eager to Close Loans
Personal loans often come with 15%–25% interest rates, much higher than home or auto loans.
Borrowers quickly realize:
EMIs are dominated by interest in early months
Longer tenure = excessive total interest
Prepaying early reduces interest dramatically
This motivates borrowers to reduce or close their loans much earlier than planned.
2. Income Growth Helps Borrowers Prepay Faster
Salaried professionals frequently receive:
Annual increments
Performance bonuses
Incentives
Variable pay
Job-switch salary hikes
These additional inflows often get channelled into loan prepayment.
For many young earners, EMI affordability improves significantly within 12–18 months.
3. Pandemic-Era Financial Awareness Changed Borrower Behaviour
COVID-19 taught people:
To reduce debt
To avoid high-interest liabilities
To maintain financial buffer
Borrowers have become more cautious about long-term liabilities, leading to aggressive early repayments.
4. Digital Lending Apps Make Prepayment Easy
Fintech platforms now allow:
One-click part-prepayment
Zero paperwork
Real-time outstanding balance visibility
EMI and interest-saving calculators
This transparency makes borrowers more proactive in reducing principal early.
5. Lower Prepayment Charges Encourage Borrowers
Many banks and NBFCs have reduced or eliminated penalties on personal loan prepayments, especially for individual borrowers.
This has removed the biggest barrier to early payoff.
6. Borrowers Prefer Debt-Free Status for Stability
Due to economic uncertainty, borrowers increasingly prefer:
Low monthly obligations
Higher savings rate
Better credit score
Reduced financial stress
Being debt-free (or low-debt) is becoming a lifestyle preference, especially among millennials and Gen Z professionals.
7. Increased Competition Among Lenders
With multiple lenders offering:
Digital top-ups
Quick approvals
Better rates
Borrowers sometimes refinance or shift loans to another bank with lower interest, resulting in early closure of existing loans.
8. Rising Cost of Living Forces Financial Rebalancing
Inflation and lifestyle expenses make EMIs feel heavier.
Borrowers close loans early to free up cash for:
Rent
Insurance
Investments
Emergencies
Education expenses
Prepayment becomes a budgeting strategy.
9. Interest Structure Favors Early Prepayment
In personal loans:
Interest is front-loaded
Early EMIs mostly pay interest
Principal reduces very slowly
Borrowers who understand this structure prepay early to cut down on long-term interest burden.
10. Better Credit Scores and Loan Eligibility
Early loan closure improves:
Credit score
Creditworthiness
Eligibility for future home/auto loans
Borrowers planning big-ticket purchases prepay personal loans to maintain a clean profile.
Trend Summary
Borrowers are prepaying faster because of:
High interest rates
Increased income
Better financial awareness
Lower prepayment charges
Digital transparency
Desire for financial stability
This trend is expected to continue as India’s credit market matures.
FAQs
1. Why are borrowers prepaying so early?
High interest rates, rising incomes, and greater financial awareness.
2. How much interest can I save by prepaying?
A significant amount—early prepayment cuts down front-loaded interest.
3. Does prepayment affect credit score?
Yes, positively. Closing loans early boosts your credit profile.
4. Do all lenders allow prepayment without penalty?
Most do, but always check your loan agreement.
5. Is it better to invest or prepay?
If your loan interest is higher than the return on investments, prepaying is smarter.
Published on : 19th November
Published by : SMITA
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