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Personal Loan

What is Personal Loan prepayment?

Key Takeaways

  • Paying off your loan sooner can reduce your loan burden by reducing your interest costs.
  • Clearing your loan early frees up your monthly income for other investment opportunities/financial goals.
  • Always make sure to have an emergency fund ready before prepaying a loan and compare the loan interest with potential investment returns to make an informed decision.
21 May 2025 by Team FinFIRST
Pors and Cons of Personal Loan Pre Payment
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Are you considering paying off your Personal Loan early? It may seem like a wise decision to eliminate debt and save on interest payments, but there are important factors to consider before making a move. In this article, we will explore the potential benefits and drawbacks of repaying a Personal Loan early to help you make an informed decision.

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What is Personal Loan prepayment?
 

Prepayment is the partial or total repayment of the loan prior to the loan term. Borrowers often repay their loans using any surplus money or bonuses they receive. While paying off your loan early may lower the total cost of interest, you may be charged prepayment fees.

Advantages of Personal Loan prepayment
 

Here’s why Personal Loan prepayment seems beneficial:

· Reduces interest charges
 

Prepayment of the loan lowers the outstanding amount, which in turn lowers the total interest payable. This means that the sooner you repay, the more you save on interest.

· Frees up monthly income
 

Premature payment of a loan releases you from the EMI burden, thus giving you greater financial freedom. The income freed up can be invested or used to fund other financial objectives.

· Reduces debt burden
 

Early repayment of a loan improves your overall financial health and credit standing. It lowers your debt-to-income ratio, making you eligible for future loans at attractive rates of interest.

· Improves credit score
 

Prepaying a p Personal Loan saves interest and reduces debt burden, potentially improving your credit utilisation ratio. While closing the account might slightly affect credit mix or history length, the overall impact is usually positive, assuming no prepayment penalties or charges exist. FIRSTmoney Smart Personal Loan offered by IDFC FIRST Bank comes with zero foreclosure charges, and offers instant disbursals within 30 minutes.

Drawbacks of Personal Loan prepayment
 

Personal Loan prepayment also comes with certain drawbacks like:

· Prepayment charges may apply
 

Certain lenders charge prepayment penalties so that the savings from early settlement is diminished. Verification of the loan document for foreclosure charges is important before making a prepayment.

· Reduces emergency funds
 

Using your savings to repay your loan early may hurt your emergency fund. It is advisable to have enough savings at hand before prepaying a large amount.

· Missed investment opportunities
 

If the loan interest is lower than the returns from your preferred investment avenue, then you might be better off investing the funds than paying a loan early. Let’s say the interest rate on your loan is 11% p.a., but you have an investment with a return of 12-15% p.a., then opting for the investment will be a better choice.

A well-timed loan prepayment can be a stepping stone to financial freedom, but only if it aligns with your broader financial goals.

How FIRSTmoney can help you in planning the prepayment of your loan
 

With an easy prepayment facility and no foreclosure charges, you can prepay your FIRSTmoney Smart Personal Loan without incurring any extra costs. IDFC FIRST Bank also offers an online Personal Loan repayment calculator for you to choose the most suitable repayment option.


Conclusion
 

Prepayment of a Personal Loan can prove to be an intelligent way to save money if done at the right moment under the correct circumstances. While prepayment can help save on the total interest payment, make sure to focus on the prepayment fees, cash requirements, and other investment alternatives before going ahead with the decision.

Disclaimer

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.

The features, benefits and offers mentioned in the article are applicable as on the day of publication of this blog and is subject to change without notice. The contents herein are also subject to other product specific terms and conditions and any third party terms and conditions, as applicable. Please refer our website www.idfcfirstbank.com for latest updates.

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