Who doesn’t hate getting stuck in the EMI cycle! Prepayment is a great option to get through this. But will you pay the penalty for repaying your loan before the term? A big no!
Let’s find a solution and explore some no prepayment penalty loan options.
The prepayment penalty is a fee the borrowers must pay if they repay their loan before the predetermined loan term. That is why it is imperative to read the loan agreement carefully during the personal loan application process. If it has a prepayment fee clause, the borrower must pay the penalty to pay off the loan early. The prepayment penalty is a percentage of the loan’s outstanding balance. Some lenders may also charge a flat-rate lump sum penalty on prepayment.
Borrowers often find it unfair to pay prepayment charges. After all, their financial condition has improved, and they are paying off their loan before repayment. So, why should they pay the penalty? It’s crucial to understand that prepayment of a personal loan means a loss of interest cost for the lender, which they want to compensate by charging a prepayment penalty. Here are three different no-prepayment penalty loan options.
Taking a Loan without a Prepayment Penalty Clause
If the borrower expects an improved financial condition and plans to prepay the loan before the term, the best thing they can do is take a loan without a prepayment penalty clause. Several lenders provide this option, though at a higher interest rate. Use a personal loan prepayment calculator to calculate the cost of prepaying the loan and compare it with the higher interest cost for a loan with no prepayment clause.
Wait for the Penalty to Expire
Many lenders have a prepayment clause, which states a deadline after which they will not charge any prepayment penalty. The penalty time often expires when most of the loan term has passed. If most of the tenure has already passed and the penalty will expire in a few months, it’s wiser to wait for the penalty to expire and then prepay the loan. The borrower may pay partial monthly payments to avoid no-payment charges by that time.
Refinance with the Same Lender
Sometimes, the borrower’s existing lender allows a loan refinance without any personal loan prepayment charges. Although not many lenders provide this facility, borrowers whose lenders allow it can benefit greatly. They get the double benefit of loan refinance and no prepayment charges. Therefore, talking to the lender while considering a loan prepayment won’t hurt. However, some lenders may impose a prepayment penalty on the new loan plan.
Those who already have a personal loan with a prepayment penalty clause will often find it cheaper to pay the prepayment penalties than to continue with the loan term. Be sure to use a personal loan prepayment calculator and do the math before making the final decision. Prepaying the loan can help a borrower save money over time that they would have spent on interest payments. Also, if their credit score isn’t excellent, they may find it challenging to refinance the loan with a new lender.
Before prepaying the loan, calculate the details and costs and use the ways mentioned above to avoid penalties. Check the details during the personal loan application process and make an informed decision after doing the necessary calculations.