Is the Pre-payment of Personal Loan Always Beneficial?

You can make use of this finance for funding your dream vacation, for wedding preparations, renovation of your house, for your kid’s education, or for purchasing new gadgets in the market.

And you know what’s the best part?

This type of credit does not need any security or collateral as it is an unsecured loan. Other than this, there are various other conveniences you can avail on this loan. However, the rate of interest you will have to bear on this loan is comparatively high as opposed to secured loans like a car loan, home loan, and more.

A good part about these loans is that it is not always necessary to transfer your salary to the concerned bank to be eligible for the finance. You can also avail a personal loan in UAE without a salary transfer.

Now,

Have you heard about prepayment on personal finance? If you have not, then keep reading.

What does Prepayment of the Loan mean?

The lenders use this term when you make payment of all the outstanding amount of loan, either partially or completely, before the loan term ends. You may end up with peace of mind on settling your loan early by using the option of prepayment. But the question here is if prepayment is always an economical option for you?

Let’s see whether prepayment proves to be a good or bad option for you through defining the advantages and disadvantages of the same.

Advantages of Making a Prepayment

Here is a rundown on the pros of loan prepayment.

A Better Credit Rating

Your credit rating is directly related to your outstanding amount of debt. If you close the loan before the end of the term, it will show on your credit Score. Making part-payments or early settlement of your loans can be classified as smart methods of improving the credit ratings.

The banks or financial institutions will consider your credit-worthiness to decide whether or not to provide you with a loan in the future. The loan prepayment is equivalent to making a successful repayment of the outstanding loan amount and closing the debt.

This helps in making your feedback better in front of the lenders making them readily offer you finance in the future.

Being Debt-free

Obtaining the loan is easy, but its repayment may not be a cakewalk. While personal finance comes to your aid during a financial crunch; however, if not handled properly, it can lead you into financial disarray.

So, whenever you have some extra funds in your pocket to spare, you must use them for the prepayment of the debt as soon as you can. This not only allows you to enjoy a life without debt but also relieves you of the stress of paying the EMIs throughout the tenure of the loan providing you with a peace of mind.

A Decrease in the EMI Amount and Loan Tenure

You have taken personal finance of a particular amount with a loan tenure of four years. You have the option of pre-closing this finance whenever you hold some extra funds. This is how you will be able to reduce the EMI amount. Also, you will not have to hold the commitment of the debt for longer durations.

The quicker you clear your loan, the less would be your burden. Most of the loans come with a lock-in period, but you can pre-close the loan after the end of this period.

You can also make use of this period for saving enough funds for the pre-payment of the loan. At the same time make a plan for engaging the installments’ amount into some investment that provides you with high returns.

Saving on the Interest

In case you have an adequate amount of funds in your pockets for making the entire repayment of the personal loan, it is advised that you do it in the initial years of the finance duration. However, you must keep in mind that a majority of the financial institutions in the UAE come with a lock-in duration. This means that you don’t have the option of making repayment on the finance amount partially or fully before the end of this period.

But, as soon as this period expires, the option of prepayment opens up for you, allowing you to save on a considerable interest amount.  

Disadvantages of Making a Prepayment

Here is a rundown on the cons of loan prepayment.

Losing a Huge Amount of Funds in One Go

Having funds in hand can be a blessing as you can use it whenever and wherever you wish to. You can also use it for catering to your instant need for funds or for investing in financial instruments, which yield better returns.

Now, it depends on you how you wish to use this cash- on the prepayment of your personal finance or by putting it to use at some other place.

Lock-in Duration

As discussed above, a majority of the banks or financial institutions in the UAE have a lock-in duration. This period starts from the day of the disbursal of the loan and lasts up to the time determined by the lender.

Hence, even if you have a sufficient amount of funds available with you, you will have to wait for this period to be over.

Charges on Pre-closing the Loan

These charges are the penalty that you have to bear when you repay the finance amount prior to the end of the loan tenure as mentioned in the agreement. These charges may vary from bank to bank.

Some lenders may not charge this penalty at all. However, you must check this before applying for a personal loan in UAE with a particular lender.

This prepayment charge is calculated on the basis of the outstanding amount of principal and the remaining finance tenure.

Over to You!

While deciding whether to make a complete or partial pre-payment of the outstanding loan amount, you must ensure that you compare the additional amount of interest that you may end up losing in the form of prepayment fees.

Moreover, try to find a loan that doesn’t levy such charges. This way, you can make the prepayment of the finance amount by making optimum savings out of it.

Therefore, if you have a sufficient amount of money, use it for complete or partial pre-closure of your personal finance. This will lead to a reduction in the debt burden and reduce the chances of default.