Is pre-closing personal loans a smart move? Know benefits & drawbacks

You save on interest costs, particularly if you make early repayments in the loan cycle when interest forms a large portion of the EMI

In recent years, personal loans have become increasingly popular in India due to their ease of access and flexibility. However, managing these loans effectively is crucial to avoid financial strain. One strategy often considered by borrowers is pre-closing their personal loans. This involves repaying the loan in full before its maturity date, which can have both financial and psychological benefits. But is it always a smart move? Let's delve into the benefits and drawbacks of pre-closing a personal loan.

 

“Pre-closing a personal loan can be a financially sound decision, especially when the interest savings outweigh the costs but it should be part of a broader financial plan. While pre-closure can reduce total interest outgo and strengthen one’s credit profile, it’s essential to evaluate prepayment charges, emergency fund availability, and opportunity cost. Making informed and timely repayment decisions can meaningfully impact long-term financial stability,” said Jayant Upadhyay, co-founder and COO of Olyv.

 

What are the benefits of closing personal loans early?

 

“Closing a personal loan early can help save on interest costs, especially if done during the initial years when interest payments are higher. It improves your credit score by reducing your overall debt burden, which reflects positively on your credit profile. Early closure also increases your monthly disposable income, giving you more financial flexibility. This can help you redirect funds towards savings, investments, or other financial goals. Early repayment also frees up your eligibility for future loans if needed,” said Adhil Shetty, CEO of Bankbazaar.com.

 

“Closing a personal loan early can significantly reduce the total interest outgo. Since personal loans are generally unsecured and have higher charges, prepaying them can lead to long-term savings. It also improves your creditworthiness by reducing your debt-to-income ratio, giving you better chances for future credit approvals,” said Amit Bansal, founder, BharatLoan.

 

What are the drawbacks? 

“The biggest drawback is the prepayment penalty, which can range from 2 per cent to 5 per cent of the outstanding loan amount. Also, diverting savings or emergency funds to close a loan early may not always be wise especially if you're compromising your liquidity,” said Vikkas Goyal, founder, Rupee112.

 

Additionally, if you’ve availed a loan with a fixed interest rate, the benefit of interest savings might be marginal in the later stages of the tenure when most of the interest has already been paid.

 

What are the points to keep in mind while closing a personal loan early?

 

Before closing a personal loan early, review your lender’s foreclosure policies and check for any prepayment penalties.

 

Evaluate whether the interest savings outweigh the charges.

 

Ensure your financial stability isn’t compromised—don’t deplete emergency funds or investments just to foreclose.

 

Request a foreclosure statement from the bank to know the exact outstanding amount.

 

After repayment, obtain a No Objection Certificate (NOC) and ensure the closure is updated in your credit report. Also, retain all loan closure documents for future reference.