Prepayment of personal loans: What you need to know before repaying your dues early

Paying off your personal loan before the tenure ends might sound like the smartest financial move—but is it always the right one?

Prepayment, also known as early loan repayment, refers to settling your outstanding loan balance before the scheduled tenure. It can help reduce interest outgo, free up future cash flow, and offer peace of mind. But there’s more to it than just saving on interest. From prepayment penalties to impact on credit score, several factors can influence whether early repayment actually benefits you.

And here's the good news—if you're using a modern, digital-first lending solution like FIRSTmoney by IDFC FIRST Bank, prepayment becomes not just faster, but also smarter. So, before you go ahead and clear your dues, let's go through everything you need to know about loan prepayments.

How does personal loan prepayment work?
 

Prepayment allows you to repay your personal loan—either in part or in full—before the scheduled tenure ends. It’s a financial decision that can reduce your interest burden, even help you become debt-free earlier than planned. Here's how it typically works:

Full prepayment
 

Full prepayment, also known as foreclosure, involves repaying the entire outstanding loan amount in one shot before the end of the loan term. This permanently closes your loan account and saves you a significant amount on interest.

Partial prepayment
 

Partial prepayment means paying a lump sum amount over and above your regular EMIs. This amount is directly adjusted against the principal, reducing your overall interest liability. Depending on your loan policy, it can either shorten your loan tenure or reduce your EMI.

Prepayment vs. foreclosure
 

Although often confused, the two terms are distinct:

• Prepayment generally refers to partial payments made toward your principal before the scheduled due dates.
• Foreclosure means full repayment of the loan ahead of schedule, ending the loan account altogether.

Understanding this difference can help you choose the right strategy to manage your loan efficiently.

Considerations to factor in before prepaying your loan
 

Before you prepay your personal loan, lenders typically set a few conditions that you must meet. These ensure that the loan tenure is substantial enough for them to recover part of the interest before allowing early repayment. Here are some common eligibility norms:

• Minimum EMI payments: Most lenders require borrowers to complete a minimum number of EMI payments—typically 6 to 12 EMIs—before they are eligible to make a part or full prepayment.
• Lock-in period: Certain personal loans come with a lock-in period during which no prepayment is allowed. This is often outlined in the loan agreement and can vary from 6 months to 1 year.

Always read your loan agreement carefully or connect with your lender to confirm whether you're eligible to prepay and what conditions apply.

Should you prepay your personal loan?
 

While prepaying your personal loan might seem like a financially responsible move, it isn’t always the best option in every situation. Here are a few drawbacks to consider:

• Loss of liquidity: Using a large chunk of your savings to close your loan early can leave you cash-strapped in emergencies, especially if the funds are diverted from your emergency or retirement savings.
• Prepayment charges: Some lenders impose foreclosure or prepayment penalties that can reduce or nullify any interest savings you were hoping for.
• Opportunity cost: The money used to prepay a loan could potentially earn higher returns if invested elsewhere, especially if your loan carries a relatively low interest rate.
• No significant credit score gain: While regular repayments help your credit score, prepaying a loan in full does not dramatically improve it beyond responsible usage patterns.

Thus, prepayment has its place, but it’s not always the most efficient financial decision. That's where IDFC FIRST Bank’s FIRSTmoney offers a smarter way to manage personal loan funds, giving you the flexibility to borrow and repay on your terms without penalties.

Benefits of FIRSTmoney – An industry-first smart personal loan
 

Here’s why FIRSTmoney is a smart choice when you need a personal loan -

1. Zero foreclosure charges
 

FIRSTmoney comes with zero foreclosure charges. You can choose to repay the loan in full prior to your repayment schedule ending without incurring any additional charges.

2. High loan amounts at competitive interest rates
 

You can get a FIRSTmoney loan of up to ₹10 lakhs to take care of any personal or professional needs, at competitive interest rates starting at just 9.99%!

3. Easy on-demand loans 
 

With FIRSTmoney, you can conveniently opt for multiple on-demand loans from your loan offer without having to apply for a new loan application every time.

4. Flexible repayment tenures
 

With FIRSTmoney, you can comfortably choose a suitable repayment tenure from 9 months to 60 months. This flexibility lets you can choose your EMI payments as per your budget, which helps avoid any financial hassles with repayment.

5. 100% paperless process
 

To apply for a FIRSTmoney loan, all you need is your Aadhaar card number and display your PAN card during the video KYC process. The entire loan procedure is digital, giving you immediate access to funds to take care of any urgent financial needs.

6. Improved credit score
 

Timely repayment or foreclosure reflects positively on your credit report. FIRSTmoney’s flexible structure encourages responsible borrowing, which can boost your creditworthiness over time.

Steps to apply for FIRSTmoney smart personal loans
 

Here’s how you can apply for a FIRSTmoney smart loan in 5 easy steps:

1. Start by scanning the QR code or clicking the loan link from your smartphone.
2. Register using your mobile number and confirm basic/personal details to check your eligibility.
3. Select the loan amount of your choice starting from ₹50,000 up to your approved loan amount and choose flexible repayment terms.
4. Link your bank account where you wish the funds to be disbursed.
5. Complete the video KYC verification process by displaying your physical PAN card.

Think smart, opt for FIRSTmoney
 

Opting for FIRSTmoney with no foreclosure charges offers a cost-effective borrowing experience along with flexible EMI repayment plans. With FIRSTmoney’s quick approval process, competitive interest rates, and borrower-friendly features, this smart borrowing option stands out among its counterparts in the market.

Why wait? Apply for a FIRSTmoney loan today to tackle any of your financial needs quickly and efficiently.