Personal Loan: Is it right or wrong to repay a personal loan early? Find out the full breakdown..

If you have taken a personal loan and have some extra cash, you might wonder whether you should repay the loan early. Early repayment can save on future interest costs and eliminate the monthly EMI burden. However, doing so is not always the most beneficial move.

What is personal loan prepayment?
Repaying the outstanding loan amount before the scheduled tenure ends is known as prepayment. You can either make a partial payment to reduce the principal amount or pay off the entire outstanding balance to close the loan. This is also referred to as foreclosure. However, banks or lending companies may levy charges for this.

When is early loan repayment beneficial?
According to experts, closing the loan early is advantageous only if the interest saved exceeds the prepayment or foreclosure charges. It is also crucial to ensure that you retain sufficient funds for emergencies after repaying the loan. While personal loans were traditionally used for emergency needs, people now take them for lifestyle expenses as well. Interest rates on personal loans are generally high, and unlike home loans, they do not offer tax benefits on the interest paid.

Maintain an emergency fund.
Experts advise having an emergency fund equivalent to at least six months' worth of expenses before paying off a loan. Exhausting all your savings to repay the loan is not a wise decision. Additionally, carefully check the prepayment and foreclosure charges mentioned in the loan agreement. Finally, make your decision by comparing the potential interest savings, charges, remaining loan tenure, and your available savings. In short, do not deplete your entire savings just to get out of debt; repay the loan early, but without compromising your financial security.

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