What Is The Prepayment Penalty On Personal Loan?

Part-prepayment charges may also be applicable while opting for advance payments. Know what a prepayment penalty is and why lenders charge it when borrowers opt for this facility. Read Now!

31 Oct,2022 11:17 IST 14 views
What Is The Prepayment Penalty On Personal Loan?

Personal loans have higher interest rates than other types, typically ranging from 10% to 20%. Nevertheless, personal loans remain the choicest option for people looking to acquire funds. Those who require money urgently prefer this loan time for its smooth and quick processing time. Moreover, there are no limitations on the usage of these funds.

For example, you can use a personal loan to pay off credit card debt, buy durable goods, plan a wedding, get medical attention, or even go on vacation. These factors make personal loans in India one of the most popular credit products owing to their ease of accessibility.

In India, many financial institutions provide personal and other loans with a similar structure, though with slightly different costs and fees. People who take personal loans also often try to prepay to escape debt. This article specifies the factors that affect a person's financial situation through the prepayment of a personal loan.

What Happens If You Repay Your Debt Before Schedule?

Among other loans, a personal loan typically has a lock-in period ranging from 3 months to a year, after which you must repay the entire balance. Therefore, if you are considering prepaying your loan, it is best to do so relatively early in the loan's term.

The prepayment of a personal loan results in significant savings. However, if you discover that you cannot begin saving for a full prepayment immediately, you can choose to make a full prepayment at any point during the tenure. Prepaying the loan is always preferable because it eliminates your financial burden.

Some financial institutions levy 2% to 5% charges or penalties. However, this requirement only applies to loans obtained on a "floating rate" basis. The Reserve Bank of India (RBI) has mandated financial institutions to stop charging borrowers for early loan repayment. As most personal loan products have fixed rates, the rule does not apply.

Prepayment fines are typically calculated based on your outstanding balance (total loan balance). Therefore, lenders will reduce your prepayment penalty the longer you have had your loan and the less you still owe.

What Is A Prepayment Penalty On A Loan?

If you’re struggling to make ends meet, prepaying your loan may seem like another burden. A prepayment penalty is a fee you must pay if you choose to repay a loan before the term expires. However, the prepayment of a loan directly affects your credit score. A full prepayment closes a loan account, improving your credit score. Furthermore, it will assist you in obtaining future credit cards and other loans.

Apply For A Personal Loan With IIFL Finance

Prepaying for a personal loan can be the difference between mitigating debt and increasing your savings. You can prepay your loan with minimal hassles by applying for a personal loan with IIFL Finance. We provide access to swift, low-interest, and flexible personal loans. Moreover, you can use the digital services of IIFL Finance to eliminate the tedious paperwork involved in loan processing.


Q1. What are the primary factors that determine your personal loan EMI?
Ans. The primary factors involved in EMI determination are as follows.
• Loan amount
• Interest rate
• Loan Tenure
• Down payment

Q2. How can I prevent paying early termination fees on the prepayment of a personal loan?
Ans. If you choose to prepay the loan after making 12 EMIs, the lender might, for example, waive the prepayment fee. Individual Retail Loan customers, however, are personal loans with no prepayment penalty.

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