Is Early Loan Repayment Good For You?

As the name suggests, a prepayment penalty is a monetary burden you have to bear when you pay your loan off earlier than specified in the agreement. If the terms and conditions of your loan agreement contain a prepayment clause, you will be penalised if you clear your debt early.

If you feel this sounds counterintuitive and are wondering why no one would want all their money at one go, think of it this way – when you repay a loan early, the lender will not get the expected interest (for lenders, the interest is their profit). Hence, this clause is often put in place.

The amount can vary, and the practice isn’t universal. It would depend on the lender’s terms and conditions. Read the fine print before you sign on the dotted line to find out.

If the lender imposes no prepayment fee, you will benefit by repaying your loan sooner. Even if this clause is in place, you could save money. It would all depend on the penalty fees and how much of the loan you have left.

First, you must determine how much you will save by paying early. You can calculate this by adding the total interest for the remaining tenure plus any ongoing fees. This final value is what you stand to save if you decide to repay your dues at present.

Subtract the prepayment and other fees from the above amount. Pay attention to the fees levied – whether flat or on a percentage basis. The remainder value is what you will save by paying your loan early. A negative figure denotes more cost than savings.

If you are confident you can pay off your loan early, looking for a lender without a prepayment clause makes sense. But not all of us can be similarly foresighted. However, even if a penalty is levied, prepayment can be a good or bad decision depending on the type of loan and your outlook. Take your pick.

Pros:

• Less interest translates to more money saved
• Improved credit score if you’re free of debt
• Free money to use for whatever you please – reinvesting, splurging, etc
• Opportunity to get a new loan that might offer a better rate
• You can avoid ongoing fees

Cons:

• Interest on business loans is deductible, and you will lose this deduction
• You might lose a significant amount through prepayment charges

Prepayment penalty is an important factor to consider when taking a loan. Though early loan closure may not be on everyone’s radar, you never know what can happen in the future. So, take all these factors into account. Just having the choice of being able to clear your debt early might be enough to give you peace of mind.

If you are considering a loan, consider taking one from HDFC Bank. Quick approval, up to 100% financing, low EMIs, and interest options all combine to give you a pleasant, hassle-free experience. So go ahead and add some luxury to your life without straining your finances. With an HDFC Bank loan, it’s that simple! To get more clarity on loan prepayments, click here.

Click here to learn more about the different HDFC Bank Loans and how you can apply for them.

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Loan disbursal at the sole discretion of HDFC Bank Ltd.