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Read this before prepaying your personal loan

personal loan preclosure

Whether you want to make a big purchase, are in need of urgent cash for medical emergencies, have wedding expenses, or need to pay for higher education, a personal loan can help. This credit facility is a popular option offered by nearly all banks and non-banking financial companies (NBFCs). It is the only unsecured loan for which you do not have to worry about providing any security or guarantee.

Features of a personal loan

  • A personal loan is a multi-purpose loan.
  • With the required paperwork and good credit history, it can get disbursed within minutes.
  • It’s an unsecured credit facility available to salaried and self-employed individuals
  • Its interest rate usually begins at 10-11% per annum
  • Its loan tenure can range from one to five years. The applicant gets the flexibility to choose the tenure.

Pre-closure of a personal loan

You could choose to opt for a foreclosure of the loan at any point, depending on your financial situation. However, before you opt for a foreclosure, you should get to know more about the prepayment of personal loans.

A personal loan usually comes with a lock-in period of about a year. After this period, one can pre-pay the total outstanding amount to save a good amount on the interest. Depending on whom you avail a loan from, you might have to pay interest on pre-payment too. The rates will vary from one lender to another, in the range of 3-5%. Look for good public and private banks that don’t charge a penalty for pre-closure of personal loans. You can then be assured, in the case of a cash emergency, of having the benefit of immediate money without it burning a hole in your pocket with its high interest rates.

The pre-payment option can free you of the financial implications and the stress of having to make payments each month for years to come.

Disadvantages of pre-closure payment

Lock-in period: Even with the necessary funds to prepay the loan, you will have to wait for this period to get over. 

Pre-payment charges: If the financial institution lending you money has a policy of charging pre-payment fees, you might have to pay extra charges despite having more money.

Loss of lump sum funds: To pay the money for the foreclosure of the loan, you might have to cut back on expenses in other areas. For some time, saving or investing funds or contributing to an emergency fund would have to be put on hold. For certain individuals, their money in deposits and investing schemes could have generated more wealth instead of being used for the prepayment of the loan, especially if you consider the extra fees to the lender.

Choosing prepayment

If there is no prepayment fee, the loan receiver will benefit from prepayment as they can save on the interest amount. If there is a prepayment fee, the actual benefit for borrowers depends on the - remaining tenure of the loan, the outstanding loan amount, and the prepayment charges. The decision can be made via estimates based on calculations by considering all factors. You can use an online calculator to check how much you can save via pre-closure of the loan. You can also manually calculate the total interest outgo for the outstanding loan. If the interest outgo amount is more than the prepayment fee, you could benefit by repaying your dues.

To sum things up,

  • A personal loan can be exceptionally beneficial in the case of emergencies
  • It gets disbursed within minutes and comes with low interest rates
  • You can go for pre-closure of a personal loan if you have sufficient funds
  • You can make the pre-closure decision based on the charges involved



The contents of this article/infographic/picture/video are meant solely for information purposes. The contents are generic in nature and for informational purposes only. It is not a substitute for specific advice in your own circumstances. The information is subject to updation, completion, revision, verification and amendment and the same may change materially. The information is not intended for distribution or use by any person in any jurisdiction where such distribution or use would be contrary to law or regulation or would subject IDFC FIRST Bank or its affiliates to any licensing or registration requirements. IDFC FIRST Bank shall not be responsible for any direct/indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information mentioned. Please consult your financial advisor before making any financial decision.